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Robinhood IRA
Robinhood the popular brokerage platform has launched its Individual Retirement Account (IRA)-Robinhood IRA, for the self-employed.
Unlike other non-employer IRA providers like Fidelity and Betterment, the Robinhood IRA makes matching contributions to your retirement savings which is 1% of your eligible contributions.
An IRA (other than SEP and SIMPLE IRA plans offered by employers), does not include the option of any matching contributions. This is obviously because there is no employer or any other entity involved that can make matching contributions in addition to the contributions you make to your IRA account.
At the time of writing this guide and to the best of my knowledge, this is the first time that a non-employer IRA is offering a matching contribution (1% of the eligible contributions).
Let us analyze the Robinhood IRA in more detail to understand its advantages, disadvantages, and any caveats.
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Robinhood IRA match
All right. Let’s deep dive into the Robinhood IRA match-who makes matching contributions, how much are the matching contributions and what are the caveats?
| Who makes matching contributions? | Robinhood instantly makes the matching contribution of 1%, the moment you make an eligible contribution to your Robinhood IRA account, up to the annual contribution limit. |
| What is an eligible contribution? | Any new deposits (not a rollover or transfer or conversion) made from a linked bank account. Funds from your Robinhood brokerage account do not qualify for eligible contributions |
| How much is the matching contribution? | Robinhood makes a 1% matching contribution to the eligible contributions you make to your IRA account, up to the annual IRA contribution limit (for example $6,500 for 2023). |
| Caveats if any | You must not withdraw your eligible contributions (which entitles you to a 1% match from Robinhood IRA) for until 5 years. If you do so, a withdrawal fee equivalent in the amount to the matching contribution is charged. |
Complex? Right? Indeed it is.
I had to read 10-15 different posts and talk to industry experts to understand the proposition here.
All right, let me try and make you understand this, with the help of an example.
| IRA Contribution limits for 2023 |
| $6,500 if you are under the age of 50 |
| $7,500 if you are 50 or older |
Lets say John opens a Robinhood IRA account. He deposits $6000 in the IRA in 2023. As he makes the deposit (which is an eligible deposit within the contribution limit of the year), Robinhood instantly makes a match of 1% of the deposit, i.e., $60. Hence, now John’s new balance in his IRA account is $6,060.
But let’s suppose, after this event, John withdraws $4000 from his IRA. This will reduce his savings in the IRA to $2000 (assuming he had no previous contributions in his Robinhood IRA account).
The amount left in his Robinhood IRA is less than the deposit of $6000 which entitled him to a 1% contribution from Robinhood. Hence, a withdrawal fee equal to the match, which is $60, will be levied.
Robinhood IRA-Eligibility
Now let us have a look at the eligibility to open a Robinhood IRA account.
There are two conditions to open a Robinhood IRA account.
- Earned income: You should have earned income. Passive income like rent from a property or stock dividends do not qualify.
- Robinhood brokerage account: This means you should be at least 18 years of age and a U.S. citizen, a lawful resident or visa holder with a valid Social Security number, and a U.S. address.
Robinhood IRA review
| Investment vehicles | Traditional as well as Roth IRAs |
| Fees | Zero |
| Withdrawal fee | Yes |
| Investment options | Stocks and ETFs (users can invest in Robinhood’s selection of 5–8 recommended ETFs, pick their own, or do a combination of both). |
| Trading option | No. According to the website, eligible users will soon be able to trade options in their IRA |
| Minimum deposit and balance | $20 |
Benefit comparisons with other IRA providers
| Fees | Account Minimum | Benefits or Promotional Deals | ||
| Robinhood IRA | $0 | $20 | A matching contribution of 1% for every dollar contributed | Learn more |
| Betterment IRA | 0.25%with a balance over $20K or qualifying recurring deposit. Otherwise, $4/month | $10 to start | 1 year of free management for new clients (Terms and Conditions apply) | Learn more |
| Charles Schwab IRA | $0 | $0 | No promotions at this time | Learn more |
| Merrill IRA | $0 | $0 | Up to $600when you invest in a new Merrill Edge® Self-Directed account. | Learn more |
| TD Ameritrade IRA | $0 | $0 | No promotions at this time | Learn more |
| Wealthfront IRA | 0.25% management fee | $500 | Get $50 customer bonuswhen you fund your account | Learn more |
| Fidelity IRA | $0 | $0 | Get $100when you open a new Fidelity retail IRA with $50. | Learn more |
| E*Trade IRA | $0 | $0 | No promotions at this time | Learn more |
Conclusion
We can conclude that Robinhood has presented an exciting IRA plan. This is the first time an IRA (non-employer IRA) plan has a matching contribution (1%) from the plan provider.
It is a good proposition for self-employed professionals and freelancers who could now opt for an IRA with some matching contributions. Earlier only employer-sponsored IRAs and 401k had matching contributions from the employer.
This meant that self-employed professionals and freelancers had to be reliant only on the contributions that they could make in their IRAs. With Robinhood IRA, they can get an extra 1% matching contribution into their account.
However, please note that this is only valid when you do not withdraw your contributions for at least 5 years. This makes sense also. In order for your funds to multiply, you need to invest them for a long time, and 5 years according to me is a bare minimum period to witness significant growth in your funds.
There are also other IRA providers like Merrill, Wealthfront, Betterment which also offer promotional offers. Check them out here.
Furthermore, a solo 401k is also a good retirement option for self-employed individuals. Check the 10 best solo 401k providers here. These solo 401k plans allow self-employed individuals to save more funds than an IRA. Read this.
