Roth IRA Options and Investment Choices With Edward Jones

Saving for retirement is a long-term commitment, and choosing the right investment vehicle can make a significant difference in your financial future. A Roth IRA offers tax-free growth and withdrawals in retirement, making it an attractive option for many investors. Edward Jones provides multiple ways to open and manage a Roth IRA, along with investment choices tailored to different risk tolerances and goals.

Understanding how to set up, fund, and invest within a Roth IRA at Edward Jones can help you maximize its benefits.

Account Setup and Eligibility

Opening a Roth IRA with Edward Jones requires meeting IRS eligibility requirements, primarily based on income. For 2024, single filers can contribute the full amount if their modified adjusted gross income (MAGI) is below $146,000, with a phase-out range up to $161,000. Married couples filing jointly can contribute fully if their MAGI is under $230,000, with a phase-out up to $240,000. Those exceeding these limits cannot contribute directly but may consider a backdoor Roth IRA strategy.

Contributions must come from earned income, such as wages or self-employment earnings. Passive income like rental income or dividends does not qualify. Minors with earned income can have a custodial Roth IRA opened by a parent or guardian, allowing them to start tax-free growth early.

Edward Jones operates through a network of financial advisors rather than offering self-directed online accounts. Investors work with an advisor to set up their Roth IRA, which may appeal to those seeking personalized guidance but typically involves higher fees than robo-advisors or discount brokers.

Funding Methods

After opening a Roth IRA with Edward Jones, investors can fund their accounts through direct contributions, rollovers from a traditional IRA, or transfers from an employer-sponsored retirement plan. Each method has different tax implications and procedural requirements.

Direct Contributions

For 2024, individuals under 50 can contribute up to $7,000, while those 50 and older can contribute $8,000, including a $1,000 catch-up contribution. Contributions must be made with earned income and are not tax-deductible, but qualified withdrawals in retirement are tax-free.

Edward Jones allows automatic contributions from a linked bank account, helping investors stay consistent with their savings. Contributions for a given tax year can be made until the tax filing deadline, typically April 15 of the following year. Excess contributions must be withdrawn before the deadline to avoid a 6% IRS penalty.

Traditional IRA Rollover

A traditional IRA rollover converts pre-tax retirement savings into a Roth IRA, requiring the investor to pay income tax on the converted amount. This conversion adds to taxable income for the year, potentially pushing the investor into a higher tax bracket.

Edward Jones advisors assist in structuring rollovers to manage tax liability. Some investors convert portions of their traditional IRA over multiple years to spread out the tax burden. For example, an investor with a $50,000 traditional IRA might convert $10,000 annually over five years to avoid a large one-time tax hit.

Once converted, funds cannot be recharacterized back into a traditional IRA, as the IRS eliminated this option in 2018. Withdrawals of converted funds within five years may incur a 10% early withdrawal penalty unless an exception applies.

Employer Plan Rollover

Investors leaving a job can roll over funds from an employer-sponsored retirement plan, such as a 401(k) or 403(b), into a Roth IRA. If rolling over a Roth 401(k), the transfer is tax-free. However, rolling over a traditional 401(k) is treated as a Roth conversion and is subject to income tax.

Edward Jones advisors help investors decide between a direct or indirect rollover. A direct rollover transfers funds directly from the employer plan to the Roth IRA, avoiding mandatory withholding taxes. An indirect rollover requires the investor to receive the funds and redeposit them within 60 days. Missing this deadline results in taxable income, and if under 59½, a 10% early withdrawal penalty may apply.

Rolling over an employer plan into a Roth IRA expands investment options beyond the typically limited selections in workplace plans. However, investors should compare fees and tax implications before proceeding.

Investment Choices

A Roth IRA at Edward Jones offers a range of investment options tailored to different risk levels and financial goals. Unlike employer-sponsored plans with limited fund selections, a Roth IRA provides access to a broader array of assets.

Mutual Funds

Mutual funds offer diversification and professional management. Edward Jones provides actively managed and index-based mutual funds, each with different expense ratios and strategies.

Actively managed funds aim to outperform the market but often have higher fees, typically 0.5% to 1.5% annually. Index funds track a market index, such as the S&P 500, and generally have lower costs, often below 0.2%.

Mutual funds in a Roth IRA allow for automatic reinvestment of dividends and capital gains, enhancing compounding growth. Investors should review fund prospectuses for historical performance, sector allocations, and management strategies before investing.

Exchange-Traded Funds

Exchange-traded funds (ETFs) function similarly to mutual funds but trade on stock exchanges. Edward Jones offers ETFs covering broad markets, specific sectors, and bonds.

ETFs generally have lower expense ratios, ranging from 0.03% to 0.75%, making them a cost-effective option. They are also more tax-efficient than mutual funds due to their in-kind creation and redemption process, which minimizes capital gains distributions.

Liquidity and bid-ask spreads should be considered when selecting ETFs. Highly traded ETFs, such as those tracking the S&P 500, tend to have tighter spreads, reducing transaction costs.

Individual Bonds

For those seeking income stability, individual bonds provide fixed interest payments and return the principal at maturity. Edward Jones offers government, municipal, and corporate bonds, each with different risk and return profiles.

U.S. Treasury bonds are low-risk and backed by the federal government. Corporate bonds offer higher yields but come with increased credit risk. Investors should assess bond ratings from agencies like Moody’s or Standard & Poor’s.

Bond investors should consider duration and interest rate risk. Longer-term bonds typically have higher yields but are more sensitive to interest rate changes. Laddering bond maturities—purchasing bonds with staggered maturity dates—can help manage risk and provide steady income.

Stocks

Investing in individual stocks within a Roth IRA offers potential high returns but comes with increased volatility. Edward Jones provides access to a wide range of publicly traded companies.

Growth stocks focus on capital appreciation, while dividend-paying stocks provide regular income. Investors should analyze financial metrics like price-to-earnings (P/E) ratios, dividend yields, and earnings growth before selecting stocks.

Holding stocks in a Roth IRA eliminates capital gains taxes on appreciation, making it an attractive vehicle for long-term stock investments. However, frequent trading can lead to transaction costs that reduce overall returns.

Withdrawal Requirements

Roth IRAs allow tax-free withdrawals of contributions at any time, but earnings withdrawals must meet specific rules. The five-year rule requires that at least five tax years have passed since the first contribution. This period starts on January 1 of the tax year in which the initial contribution was made.

Qualified withdrawals must also meet one of four conditions: the account holder is at least 59½, the withdrawal is due to a permanent disability, the funds are used for a first-time home purchase (up to a $10,000 lifetime limit), or the distribution is made to a beneficiary after the account holder’s death. If these conditions are not met, earnings withdrawals are subject to income tax and a 10% early withdrawal penalty unless an exception applies.

Non-qualified withdrawals may avoid penalties if they fall under IRS exemptions, such as unreimbursed medical expenses exceeding 7.5% of adjusted gross income (AGI) or higher education costs for the account holder, spouse, children, or grandchildren. These withdrawals remain taxable but are not subject to the 10% penalty.

Fees and Custodial Charges

Edward Jones operates on a financial advisor-driven model, which typically results in higher fees than discount brokers. Costs may include account maintenance fees, trading commissions, and expense ratios on investment products.

Edward Jones charges an annual IRA account fee, usually around $40, though it may be waived for clients meeting certain asset thresholds. Mutual funds and ETFs have expense ratios that vary based on management style. Investors purchasing individual stocks or bonds may also encounter trading commissions, typically ranging from $4.95 to $19.95 per trade. Advisory accounts, which provide ongoing portfolio management, often have an annual fee based on assets under management, typically between 0.85% and 1.35%.