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Your First Investment Account: In Search of the Friendliest Brokers for New Investors

Ready to open your first investment account? Congrats. Here’s what to look for in a broker or mutual fund company when you open an IRA or other trading account.


Here are two questions I get all the time:

  • “Okay, I know I need to open an IRA. But where? E*Trade? Fidelity? My local bank?”
  • “How can I start investing with just $500?”

Today, I’m going to quickly tackle both. If you’ve been holding out on starting your own Roth IRA or other investment account, no more excuses. I’m going to show you how (and where) to open an account today—even if you can only deposit a couple hundred bucks.

Note: Before we dive in, if you’re in credit card debt, focus your efforts on paying that off before starting to invest. See my six and a half steps to financial security for more guidance about what to do first and when to start investing.

In a world with tens of thousands of investment options and a torrent of market information flowing 24/7, the simple act of opening an account to invest for your future retirement is intimidating.

It doesn’t have to be.

You can ignore how the stock market’s doing today. You can forget the thousands of individual stocks. The key is to put your blinders on and focus on what’s important:

  • Opening the right kind of account.
  • Getting your money in.
  • Minimizing expenses.


THE RIGHT KIND OF ACCOUNT

If you earn less than $120,000†, the first kind of investment account you should open is a Roth IRA (individual retirement account). Even if you already have a 401(k) at work, the Roth IRA is a powerful account for long-term investing because in a Roth, you money grows tax-free and, when you retire, you withdrawals are tax-free, too.

In 2011, investors under 50 can contribute up to $5,000 in a Roth IRA. If you’ve already done that (or earn too much to open a Roth, you may consider opening a taxable investment account). With a taxable account, there are no restrictions to how much you can invest or when you can withdraw money, but you’re responsible for paying income taxes on your gains annually.

It’s important to note that account types (like Roth IRA, traditional IRA, etc.) are nothing more than labels to your investments for tax purposes.

An IRA is like a bucket.

Once you have that bucket, you can fill it with anything you want…stocks, bonds, mutual funds, certificates of deposit, even peer-to-peer lending notes.

Just to be clear: when you open IRA and begin buying stocks or mutual funds, you’re no less of an investor than somebody with a taxable trading account.

GETTING YOUR MONEY IN

The next step is to just start investing. The sooner you get your money out of your checking account and into a mutual fund, the sooner you can potentially earn a return. Forget about what the stock market is doing today or what you think it wild or next week. The right time to invest is when you have the money to invest.

Every year, SmartMoney Magazine conducts an exhaustive survey of discount and full-service stock brokers. (When I worked there, I actually helped with the research, and can attest to just how through they are). So you would do well to pick any of their picks for best discount brokers. Six that almost always make the list are:

But SmartMoney’s rankings aside, where’s the best place for a NEW investor to open an account?

Ideally, somewhere that doesn’t require a big opening deposit, doesn’t charge low-balance fees, and offers a variety of low-cost mutual funds. Here’s a look at how several popular brokers look to new investors. (The list is in no particular order, although TD*Ameritrade was recently voted #1 by Barron’s for both novice investors and buy-and-hold investors.)

SOME BROKER PICKS FOR FIRST-TIME INVESTORS

Minimum Opening Deposit No. Mutual Funds Stock/ETF Commission
TD Ameritrade $0 15,000+ $9.99
Scottrade $500 14,500+ $7
TradeKing.com $0 3,000+ $4.95
Fidelity $2,500* 4,600+ $7.95
E*Trade $500 8,000+ $7.99 – 9.99
Charles Schwab $1,000* 14,500+ $8.95

*Minimum deposit waived with recurring automatic investments.

As numerous people have aptly pointed out in the comments, new investors should also strongly consider Vanguard mutual funds. I didn’t originally include Vanguard here because most of the funds require a $3,000 minimum initial investment, which may be off-putting to some new investors. That said, their collection of low-cost mutual funds are IDEAL for buy-and-hold investors that will HOLD funds for many years or even decades. Again, check the comments, and give Vanguard due consideration.

MINIMIZING EXPENSES

Wherever you decide to invest your money, an often-overlooked key to successful investing is to keep your expenses to a minimum.

What does that mean?

For one, it means holding your investments for a long time to avoid racking up commission fees.

Next, it means paying attention to a mutual fund’s loads, transaction fees, and expense ratios. Mutual fund loads are basically sales charges for buying the fund. Transaction fees are charged on some funds (often those without loads) for buying or selling shares. Finally, a fund’s expense ratio is the cost to run the fund). The expense ratio covers things like the investment advisory fee, administrative costs, and other operating expenses. Your broker may list a mutual fund’s expense ratios, or you can get free research on tens of thousands of mutual funds from fund-rating service Morningstar.

THE BOTTOM LINE

There’s a lot to learn about investing, but ignorance is no excuse for inaction.

If you’re debt-free, have secured a decent stash of emergency savings, and are wondering what to do next with your money, it’s probably time to start investing. Take it slow, learn as much as you can, and start buying to some mutual funds and ETFs. Don’t start trading like crazy, and don’t worry about what the market’s doing from day to day.

Slow and steady wins the race.

What about you? Where do you invest and why?

###

† This is an oversimplification. Read more about the Roth IRA income limits.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. great condensed info. Is charles schwab the one where you can start with $50 and build it up to 1k if you don’t have 1k to start? thanks!

    • David Weliver says:

      Both Schwab and Fidelity will waive the minimum deposit on IRA accounts if you enroll in an automatic transfers from your checking account to the IRA. For Schwab, you need to transfer at least $100 a month.

      Here’s the language they use:

      “Schwab IRA (includes Traditional, Rollover, Roth and Roth Conversion accounts), Education Savings Account and Schwab One® Organization Account – $1,000 per account.

      The Minimum Deposit Requirement is waived if you establish an incoming monthly transfer of at least $100 through direct deposit or Schwab MoneyLink.”

      • Thanks David. So sounds pretty easy then to just get a automatic transfer of $100 from your checking account each month, to your IRA account, to build up to the 1k if you don’t have the 1k on hand.

  2. Just to add in on the Roth income limits…

    You CAN still contribute to a Roth if you are ove the income limit (with a workaround). To do so, you must make a contribution to a nondeductible IRA and convert it to a Roth. There is currently no income limitation on Roth conversion.

    • The IRA limit for both Roth and traditional is 5K, so if I contribute to a traditional IRA, and then convert it to Roth, I’ll only have 5K – taxes?

      • If it was a non-deductible contribution, you won’t pay any taxes (well you will pay tax on the earnings above the contribution).

        If it was a deductible contribution, yes you will pay tax on it, but pay the taxes OUTSIDE of that account. If you pay it without the money in that account, that amount will not be considered part of the conversion, but a early withdrawal, and you will owe taxes and the 10% penalty.

  3. I don’t necessarily want this to be an advertisement, just personal experience. We use Northwestern Mutual. One of my college friends is an agent. My wife and I both have Life Insurance, Disability Insurance, Roth IRAs and I have an additional traditional IRA that I opened when I rolled over a previous 401(k). So far, I’m happy with the service.

    However, I’d say choosing the right funds is more important than choosing the right company.

  4. I am 24 years old. What specific type of funds do you recommend for your ROTH IRA? I currently am invested in a 2040 target fund. Any other ideas on some good mutual funds?

    • David Weliver says:

      Hi Matt,

      I’m working on a post that will highlight some good funds (and how to find others) for your IRA, it should be up in the next two weeks. For those that want to make the decision as simple as possible, however, a target date fund like the one you’re invested in is a good bet.

  5. What about Vanguard? Is there a reason you don’t suggest that? I have heard good things but am trying to decide between them and Schwab at the moment.

    • I use Vanguard and like it alot. However, Vanguard doesn’t fit the topic of this article, because they have a minimum of $3,000 (which they will not waive with automatic deposits) so you can’t open an account with $500.

      • David Weliver says:

        Exactly, Brian. I’m a big fan of Vanguard but in the context of this article, they just aren’t as friendly to new investors.

        I even had the opportunity to do a presentation for some of their employees a year or so ago and I asked them why they didn’t drop their minimum investment amount…the answer was that it simply wouldn’t be profitable for them.

        • Getting started is the first step towards a better financial future. Thanks for the article to kick off this topic. I agree with both you and Brian on Vanguard funds. There are very few (or almost not other way) to guarantee higher returns other than lowering fees, and I love Vanguard’s focus on lower fees. I also agree with the minimum and lack of investor-friendliness.

          On that note, there are a number of companies now working in this new space of combining a strong focus on lower fees, increasing investor-friendliness in the investment process, and really lowering the investment minimum barrier for investors. Many of them actually utilize a number of Vanguard funds. WiseBanyan, Wealthfront, and Betterment are just three examples. (Full disclosure: I am a co-founder of WiseBanyan).

  6. Have you considered index funds? I’ve been investing in Vanguard’s Social Index Fund and been really happy. Not only with the returns, but also that my retirement isn’t financing weapons for Gadhafi right now.

    This year, I’m considering the Lending Club’s Roth IRA. Does anyone have any experience with them? It seems really risky (ie if they go bankrupt, bye, bye IRA) but also an interesting way to obtain high growth diversification…

    • David Weliver says:

      I invest a bit in Lending Club but only as a small percentage of my portfolio (for the exact reasons you mention). You could certainly do this with their IRA option while maintaining IRAs invested in other kinds of investments. You can have multiple IRAs as long as your total annual contributions are within IRS limits.

  7. Now if a potential plan was the future purchase of a first home, Would a Roth IRA work, or only a traditional IRA for being able to withdraw the money penalty free for the downpayment?

    • David Weliver says:

      Marc, you can withdraw up to $10k of a traditional IRA or Roth IRA for the purchase of a first home. A benefit a Roth IRA is that you can withdraw the principal anytime without penalties (but NOT the earnings except in certain situations like up to $10k for a first home).

  8. This post couldn’t have arrived at a better time – thanks! Ignorance has been my excuse for inaction for awhile now, and my goal is to put a stop to it ASAP.

    I opened a Roth IRA at TradeKing awhile back after reading glowing reviews. However, I am ashamed to admit the money I put in has been sitting there collecting nothing but dust because I can’t figure out how to invest it. There are simply too many choices and settings to fiddle with, and I have no idea what any of them mean. I’m currently watching the New Client Orientation webinar recording, and I feel like they’re speaking a foreign language.

    I am beyond frustrated at this point. I am an intelligent woman with a master’s degree. I am usually a very quick study and love to learn. What is it about this stuff that completely paralyzes me? I really don’t want to be involved in the nitty gritty of trading individual stocks. Am I missing something that would make investing simpler, or do I need to look for another place to house my IRA so it can actually grow?

    I’ve been reading a little bit about Vanguard Target Retirement Funds, and now I’m intrigued by the previous commenter’s mention of their Social Index Fund. These sound a little more in line with my lack of investment experience and lack of time for tinkering with an investment portfolio. Can anyone speak to the pros/cons of Vanguard vs. the discount brokers mentioned here? Is the $3,000 minimum the main drawback to “new investors” (it’s not an issue for me) or are there other hurdles?

    I’m only going to be under 30 for a few more months, so I need to get my IRA growing!

    • The $3000 minimum is the only hurdle for Vanguard. If you can make that, I highly recommend them.

      Their target date funds are great as well.

      I’d recommend doing a direct (Trustee to Trustee) transfer of your account from TradeKing to Vanguard. The key is to make sure you personally never touch the money. This ensures the IRS won’t hit you with penalties for withdrawing it.

      Call Vanguard and they should be able to walk you through the process.

      • I like Vanguard too. Not to confuse things Nicole, but index funds with low expense ratios can save you hundreds of thousands of dollars in the long run. Vanguard is known for this, you can find funds that charge very little, like 0.50%. I don’t work for vanguard just have done research on this stuff for myself and my friends. If you don’t do a target date fund, you really only need to pick 3 funds so you can read about the fund, and also fee’s, and then pick.

        • Actually you’ll find funds with even lower expenses at Vanguard. The Target Retirement Funds have 0.19% expense ratio.

          Though I do agree that 3 well picked funds can accomplish the same goal.

          • Hi Nichole –

            I started with Vaguard a couple years ago after looking at lots of other services. It was no contest. But then, I knew I wanted to invest my Roth IRA in index funds since I was planning on essentially investing and ignoring them for 40 years or so.

            As Brian said, Vanguard’s expense ratios can’t be beat and they have some of the longest running index funds in the industry. I ended up having to shift investments a couple times and their online system made it really easy (and free!). The Social Index fund has a slightly higher expense ratio (0.28%) but that’s nothing compare to most funds, plus they do have to screen the companies for social, human rights and env criteria. Hope that helps…

          • Thank you all! This makes me feel more confident in making the switch, and actually doing something productive with my IRA for a change.

          • Just to add my 2 cents – I agree that low-cost passive indexing is the way to go. There’s nothing out there that can guarantee higher returns other than lowering fees.

            As for Vanguard funds, another one you might be interested in is VTI (Vanguard Total Stock Market ETF), which will give you exposure to large-, mid-, and small-cap equities in the U.S. The expense ratio is just 0.05%.

            Lastly, I’ve seen the Vanguard minimum mentioned a few times across different threads. There are a few companies with a low-fee ethos similar to Vanguard that also create diversified portfolios focused on lowering minimums that might be interesting to research: WiseBanyan, Betterment, Wealthfront are just a few. (Full disclosure: I am a co-founder of WiseBanyan). Many of these companies actually use a few Vanguard funds. However, these companies aside, big fan of Vanguard funds, especially over using online brokerages.

  9. The Oil Barron in Training says:

    Are the Roth IRA limits based off of gross income, net income, or adjusted gross income (AGI)? I;m right on the edge, so if there is a difference I might be able to open one.

  10. Amberleigh says:

    Will someone please explain to me how expense ratios work? What does 1% mean? (or .3 or .5)?
    I always thought fees were just if you moved your money around, but now I am starting to see that there is an annual fee no matter what you do?
    I have a target date fund and I like it – no thought required.

    David, maybe in a future post you can speak to contributing to the match vs. contributing to the max of your company plan before starting an IRA? At first I was trying to work up to the max of the existing plan (simpler!), but now I am thinking starting a ROTH would be a better plan.

    • Amberleigh says:

      Also, just to clarify my prior comment, my target date fund is my TSP (which is like your 401k/403b etc.)

      • Amberleigh,

        As a federal employee, you are actually in great shape when it comes to expense ratios. Since the thrift savings plan funds are so large (and run by the government thrift investment board), their expense ratios are lower than anything you can find in private industry!

    • The percentage is the amount of your account they charge as a fee each year. If you the expense ratio is 1%, the brokerage house would take $1 for every $100 you have invested in the account. If the ration is 0.2% they would only take 20 cents for each $100

    • David Weliver says:

      Thanks for helping out the questions, Brian. Amberleigh and others, here’s a good explanation of mutual fund expense ratios and other fees.

      All the great comments and questions here remind me that I need to do several posts soon—one on expense ratios and fees, one on recommended mutual funds, and one on non-retirement investing.

      • No problem. I figure I owe you that for winning your contest a few months back.

        Plus it is actually a topic I am fairly knowledgeable in.

  11. Something I’ve been thinking about lately is investing outside of retirement vehicles…if that is in fact what i should be doing. I invest with each paycheck in a 403b with a great company match. I have a roth IRA from before i had a job that had a plan. I am not maxing out either of these (just dont get paid that much, does anyone??), but if i want to invest some money for mid-term goals other than retirement (i’m 30) like down payment on a house, and just life….where should i do that? and what are the tax consequences (that may be another post altogether)

  12. What about utilizing Vanguard Brokerage setup to invest in non-VG ETFs and general stock?

    Fantastic and timely piece and useful comments–how novel!

  13. I have been using Fidelity since day 1 (I started about 3 years ago). They have great tools for researching stocks, bonds and mutual funds to help you make decisions. They have many no-fee funds for your ROTH IRA’s which is great to have. On top of that, they have terrific customer service–they respond promptly to questions via email and I have always been able to speak to someone live on the phone and not wait forever on hold.

  14. Just for your info… ZECCO isn’t allowing 10 free trades a months anymore. 3/2/11 Stay with a company that will be hear for a long time, And that is Scottrade. I have a new referral code if needed. Referral code is : IXFV9382 This is now active and will get you 3 free trades to get everybody started. I get 3 free also. so thanks if your interested. Open a Roth IRA and get started in investing.

    Referral code: IXFV9382

  15. Amberleigh says:

    I did it!! I set up my first Roth IRA this morning =)
    I feel like I accomplished something. Thank you everyone for all the tips and information. I am college educated and a working professional but I always felt this was one more thing I didn’t have time for. Thanks for correcting that false impression.

    I put the full amount in my 2010 account and started contributing towards 2011. (I went with the vanguard target date fund – but I Did compare this to their other funds before just picking this one – it seems like a great value.)

  16. You made a good choice…. Remember to keep adding to your plan…

    Brent

  17. Daniel Groot says:

    This has been such a helpful post. Great to get the reviews for the different companies.

    I work for a nonprofit that uses TIAA-CREF for their retirement plans but my wife uses Vanguard.

    (and just b/c it was mentioned earlier I also have a little money in Lending Club).

    any thoughts on comparing TIAA-CREF to Vanguard or even Lending Club? And like an earlier poster the $3000 limit isn’t an issue at this point.

  18. Wondering for those of us who are interested in automatic investment accounts, what options exist?

    I have researched ING’s sharebuilder quite a bit, however, I’d like to know which other services provide something similar.

    I am 100% in support of automatic and consistent investment. Not day trading.

    Thanks for any help or direction!

  19. I’m on track to open up a Roth IRA sometime later this year (currently, I’m working on finishing off some credit card debt). In the mean time I’ve begun to educate myself on retirement investing. One thing I’ve noticed and I’m confused about are “IRA Savings Accounts”. My bank, Wells Fargo, offers one called a Destination IRA: https://www.wellsfargo.com/investing/retirement/ira/select/destination

    What is the difference between something like this and opening up an IRA that is geared toward investing, like Vangaurd, other than really low interest rates?

    I’m thinking about opening one to build up my account (and avoid fees) in order to eventually have enough to open a higher yield target date fund. Would a high yield savings account through a online bank like FNBO be a better and simpler option (much higher interest rates)?

    Does this plan even make sense? I appreciate all the feedback and help!

    • Hi Adam,

      That Destination IRA you linked to via WF is simple a traditional or Roth IRA (your choice) that is geared towards putting your money in low risk accounts like money markets & CDs…you can always transfer your money from these types of funds to more equity based funds as you see fit.

      In my opinion, depending on your age (30s or younger I presume though), the Destination IRA seems to be a far too safe of an option for people like me (whose 30). Another thing, money markets and CDs don’t generate much of a return. Sure, there may be a high yield savings account available through on online bank that may offer 2.5% compared to maybe 2% on the CDs thru that Destination IRA. Sure that .5 difference is huge (25% larger than that 2%) but only really has a significant impact when you have alot of money. With a Roth/Traditional IRA restrictions being $5,000 for those under the age for the catchup bonus (as you stated you’re starting a Roth IRA), that .5% doesn’t mean much.

      In my personal opinion, if you have the $5,000 to start a Roth IRA, you can still go through Wells Fargo, but you should look into equity based funds. The majority of us who use this site are young enough to accept the fluctuations in the market. Remember, the success of your retirement portfolio should not be based on the daily or weekly fluctuations of the market, but the market over 5 or 10 years, even decades…we are young enough to recuperate our losses.

      Also, in my personal opinion, I prefer Vanguard over Wells Fargo. While I’m not sure what the minimum investment is for most of WF’s funds you can access as part of a Roth IRA portfolio, even if it’s really low, I still prefer Vanguard (most fund minimums are $3,000 & up). Despite the minimum investment threshold, the fees at Vanguard are significantly lower than at WF (I know having moved my IRA out of WF to Vanguard and having my 401k with Vanguard). Even the no-frills, “just throw your money in it and don’t touch it” Target Retirement funds have an expense ratio of 0.19% (at least for the 2 I’m in…the 2040 & 2045). Many of the funds I was in with WF was 1.0% or higher.

  20. I think that it’s also important to note that while Vanguard has a $3,000 minimum investment & up for just about all their funds, they also lowered their minimum investment for many of their Admiral Funds.

    These Admiral Funds have even lower expense ratios than the non-Admiral funds by the same name.

    In my 401k, I don’t have an option to invest in these Admiral funds, so my expense ratios for the funds I have are in the 0.20-0.35% range, with my highest being 0.49% which is a Vanguard fund ran by an outside firm.

    However, when I moved my IRA over, I put my money into 3 Admiral funds that had the minimum investment lowered to $10,000. The 3 funds have expense ratios of .18, .14, & .14% respectively.

    So for those with IRAs with Vanguard, you should really check your balances and see if the funds you have in that IRA have a Admiral fund by the same fund name & see if you can move your money over into that lower cost fund.

    Over decades, those lower fees can really add up, especially if you are putting in the $5k max yearly & religiously.

  21. I have a question. If I am ineligible for roth IRA contributions(over $176,000 married filing jointly), then I also don’t get tax deductions contributing to the traditional IRA(over $109,000 married filing jointly). Are there any benefits of still contributing to the traditional IRA? If I do contribute, do I get taxed twice? Once because I don’t get tax deductions now, and again when I withdraw?

    • If you contribute to a traditional IRA but are ineligible for the deductions, your IRA would have a basis equal to the amount of nondeductible contributions. This would be taken into account later when withdrawing.

      However, you can contribute to the traditional and immediately convert it to a Roth, because there are no income restrictions on conversions. That way it is all tax free when withdrawing.

  22. While saving up for the 3,000 minimum investment for Vanguard, should I invest elsewhere? I’m a first time investor with a job, 6-month emergency cash fund, and no bad debts.

    • Probably not the popular answer, but I’d be inclined to take the $3,000 minimum from that emergency fund to start the Vanguard account, and pay it back to the emergency fund with the money I would be saving for Vanguard.

  23. I have almost $9K in retirement account from two ex-jobs, no credit card debt, a mortgage, 27 years old. I recently returned to grad school and make only about 18K a year. I don’t know what to do with my retirement accounts and was thinking of rolling over so I can continue to invest small amounts (maybe $50-100 per month) so I don’t get behind on saving for retirement. I’m completely confused and not sure what type of IRA or which company would be best for me. Please let me know if you have any suggestions!

  24. I’d go with investing so much each and every month at Scottrade. For $7 a trade , you can’t get a streamer quote and gains/loss tracker and also good service close by.

    Scottrade referral code: IXFV9382 Will get you 3 free trades for openning up a Scottrade account. Start investing as soon as possible. You won’t be able to retire if you don’t start.

    Happy investing everybody….
    Dave

  25. I have a few questions and I’m hoping someone can offer some advice to me. One of my best friends recommended a financial advisor to me late last year (I was looking and asking for recommendations). I have since used him to open a Roth IRA as well as a Brokerage account and I have $75/month transferred to each. I feel like this is a decent amount for me as I already invest into my Fidelity 401(k) through my company as well as put money into my liquid savings. The two questions I have are- has anyone worked with a company called Securian? My accounts are through Securian and I had never heard of it before until I started with this advisor. Next, I haven’t made any money. I know the market can be up and down but I’m literally breaking even after 10 months. I don’t plan on using this money any time soon and I’m not technically “counting” on it but I feel like it would be better off in a savings account- am I just being impatient or should I be concerned? Also, has anyone worked with Securian, and if so, do you have any feedback (good or bad)? Thanks in advance!

    • The fact that you haven’t made money this year is troubling. The broad market indices are all up 20% YTD. Sounds like this advisor could have you invested in volatile individual stocks instead of broad ETFs. As a measuring stick, my unmanaged TSP (401k) is up over 14% YTD.