You May Be Putting Your Retirement Money in the Wrong Place


For many investors, their primary — if not only — retirement investment account is their workplace 401(k) plan. But if you also have an IRA, perhaps because you rolled over the balance of a workplace plan from a former employer, it's important to make sure your account is at the best broker. Making that determination depends mostly on the size of your portfolio, the types of investments you prefer, and how much trading you do. (See also: Begin Your Investment Career Right With Some Mutual Fund Basics)

Let's take a look at some of the variables.

Portfolio Size

If you're just getting started with investing, the minimum amounts required to open a brokerage account (where you'll be able to open an IRA and buy and sell stocks, mutual funds, and other types of investments) are a good starting point for choosing a broker.

Several brokers require no minimums for opening an account, including TD Ameritrade, E*TRADE, and ShareBuilder. At Fidelity, the minimum to open an IRA is usually $2,500, but if you commit to investing $200 per month automatically, you can open an account with your first $200.

Preferred Investments

What types of investments do you want to make and how often do you plan to trade? The main investment choices are stocks or mutual funds.

Stock Investing

While I recommend mutual funds over individual stocks for most people because funds are inherently diversified and therefore usually less risky, if you prefer stocks you can usually find a broker running a promotion for a certain number of free trades. For example, OptionsHouse is offering 150 commission-free trades for those opening a new account. After that, their commission is a low $4.75 per trade. TradeKing's stock commissions are almost as low at $4.95 per trade.

It doesn't take much money to invest in stocks since you can buy as little as one share. For example, as of this writing, one share of Microsoft could be purchased for a little over $45 plus commission. Of course, you'll need to invest in more than one company in order to be adequately diversified, so the lower the trading fees the better.

Mutual Fund Investing

All mutual funds have minimum initial investment amounts that need to be taken into account, often starting at $1,000. In many cases, you'll also pay a transaction fee (commission). However, this is an area where brokers distinguish themselves by offering a number of no transaction fee (NTF) funds. Fidelity, Schwab, and Scottrade are some of the leaders here. Fidelity, for example, offers nearly 3,000 NTF funds. The fee for investing in most of the other funds offered through Fidelity's platform is $49.95, although some cost $75.

To make up for the fee income they forego by offering NTF funds, brokers typically charge a short-term trading fee if you sell certain NTF funds within 60 to 180 days. For its funds that such fees apply to, Fidelity's short-term period is 60 days, which is the shortest short-term trading period I'm aware of. If you sell any of those funds more quickly than that, you'll pay a fee of $75. Schwab's and Scottrade's short-term holding period is 90 days. TD Ameritrade requires that you hold some of its funds for at least 180 days.

If you're a buy-and-hold investor, short-term holding period restrictions may not matter to you. But if your investment strategy calls for a certain amount of trading throughout the year, such restrictions, and the potential fees involved, can make a big difference.

If you're strictly an index fund investor and are partial to the low-cost funds offered by Vanguard, the company that invented index funds, open your account there. The vast majority of Vanguard's mutual funds and exchange-traded funds are commission-free. You can buy Vanguard's funds through other brokers, but you'll usually have to pay a commission for doing so.

Exchange-Traded Funds

ETFs are considered a type of mutual fund since they hold multiple stocks or other funds. However, they are bought and sold in a fashion similar to stocks. Investors can purchase a single share, for example, and the commission structure is typically the same as what a broker charges for stocks. Here, too, some brokers offer a number of no-commission ETFs. Schwab, for example, offers over 100 ETFs that may be bought or sold without paying a fee. Fidelity offers 80. Some brokers charge a short-term redemption fee if you sell a commission-free ETF within a certain time frame.

Stocks and funds. If you invest in both stocks and mutual funds, you'll want a broker that charges a reasonable commission for stock trades and offers a wide assortment of no transaction fee mutual funds. Whereas ShareBuilder offers both types of investments and charges just $6.95 per stock trade, its lineup of NTF mutual funds is very limited. In this situation, Fidelity, Schwab, or Scottrade may be better options.

As you can see, there are lots of choices when it comes to brokerage houses, and this represents only a framework for making an informed choice. See if account minimums apply to you and make sure you understand the fees involved for making the types of investments you prefer and for trading them as frequently as you plan to. Be sure to look at more than just the commission schedule, understanding short-term holding period requirements as well.

If you have investments outside of a work 401(k), where do you keep them? Please share in comments!

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