All About Robinhood Retirement, IRAs from Robinhood

The app-based brokerage Robinhood, which has been changing the way people invest by creating a simple app that allows them to invest in stocks, bonds, options, and cryptocurrencies, has now launched Robinhood Retirement, a new option that allows people to invest in an IRA using Robinhood.

To attract people to the new offering, Robinhood is providing an interesting incentive: a 1% match on funds that people contribute.

Employer matching is fairly common for 401(k)s, another type of retirement account. Most brokerages do not offer any kind of a match for IRAs, though.

By offering the match, Robinhood is probably trying to attract more of its younger users to retirement accounts. If you’re in your 20s, it’s harder to think ahead 40 years to your retirement. The 1% match provides an incentive that people can see right now.

What kind of accounts does Robinhood Retirement provide?

Robinhood Retirement provides both traditional and Roth IRAs. Although each person’s tax situation varies, traditional IRAs generally allow you to deduct any contributions on your taxes immediately, whereas Roth IRAs contributions are not tax deductible.

Money in a traditional IRA grows tax-deferred, whereas money in a Roth IRA grows tax-free. That’s a big advantage to people who are willing to stash away money for the future. They can get tax advantages in the short term, and tax-deferred or tax-free growth of their investments in the long term.

More to the point, retirement accounts were one area where Robinhood previously fell behind the competition. By only offering taxable accounts, they were missing out on a big slice of the investment industry. Adding retirement accounts makes sense because it makes Robinhood more of a full brokerage instead of just an investment app.

The strategy also makes sense for Robinhood because IRAs are for the long term. Especially with the volatility in crypto and declining revenue, Robinhood is probably looking for any opportunity to lock in investors so they don’t float away to the newest, sexiest app the minute it comes out.

Can I use Robinhood for my 401(k)?

Although Robinhood Retirement is mirroring the idea of a 401(k) match, it appears that in the beginning, anyway, they only offer IRAs.

That said, most brokerages allow you to convert an existing 401(k) into an IRA. It’s not yet clear exactly what conversion options Robinhood will offer.

They may allow you to do things like converting a 401(k) or converting a traditional IRA to a Roth IRA, but the exact options aren’t yet clear. It’s also possible that Robinhood may add options for other types of retirement accounts, like a SEP IRA for self-employed people.

Who is Robinhood Retirement for?

In all their marketing materials, Robinhood makes it clear that their retirement accounts are geared towards gig workers, freelancers, and other people who may not have access to tax-advantaged retirement savings through work.

Essentially, they’re trying to bring in people who fall outside the traditional retirement investing space. They’re doing that through the match but also by applying their gamification model to the world of retirement investing.

The marketing for Robinhood Retirement features slick graphics that demonstrate how money can grow through compound interest over a long time horizon.

Retirement investing is probably one of the least sexy topics around. If Robinhood can make it a bit more interesting through gamification and marketing, and if that allows more people to access the advantages of tax-deferred or tax-free retirement accounts, that’s probably a net gain to society.

The concern is that Robinhood thrives on transaction volume. They want you to trade a lot because they get paid for selling data on trading activity to other people.

That approach is often antithetical to long-term investing, which focuses on long time horizons. It’s not yet clear whether the ethos of Robinhood, which encourages rapid trading, really fits with the staid, plain-vanilla world of retirement investing.

Alternatives for Retirement Investing

Although Robinhood Retirement is a compelling new offering, especially with a 1% match, it’s certainly not the only option out there.

Legacy brokers such as Vanguard provide a huge mixture of different retirement account options, and have the expertise to facilitate more complex conversions, account types, and more.

Newer online brokers offer retirement options as well. E*TRADE, for example, has a full suite of IRAs, Roth IRAs, and other types of accounts.

Robinhood is entering a crowded field by providing retirement options. That’s likely why it’s offering such an aggressive matching contribution since it needs a way to stand out from the competition.

How to Sign Up for Robinhood Retirement

As I write this a few days after the launch of Robinhood Retirement, the service currently has a long waitlist. It seems that many people are interested in the advantages of retirement investing.

You can sign up to be on the waitlist, and Robinhood advances your position based on how many people you refer to the service. The service will likely roll out in earnest in the first quarter of 2023.

If you’d like to sign up, you can go directly to the Robinhood website, or you can use my link. I’ll get a little commission, and you’ll get a few dollars worth of free stock if you sign up using my link.

The Long-Term Outlook for Robinhood Retirement

Thinking long-term, it’s hard to know where Robinhood Retirement will be. The app is new and trending now, but when many of its 20-something users retire in 40+ years, it’s hard to know whether Robinhood will still be around.

The good news is that because Robinhood has full SIPC insurance, even if something happened to the company down the line, the stocks, bonds, and other traditional securities in Robinhood investment accounts would still be protected.

If you’re a younger person just dipping your toes into the world of retirement investing, or you’re a gig worker/freelancer who doesn’t have access to retirement accounts through work, Robinhood Retirement might be a good fit.

It also might work well for you if you know you won’t commit to investing in a normal IRA, and the gamification aspects of Robinhood make you more likely to invest.

The trick is to take advantage of Robinhood’s easy process and 1% match without falling into the tendency to trade frequently. With retirement accounts, more than other types, a long-term approach is often the best strategy. Think about your overall investment strategies and talk to a professional advisor before you embark on any investment path, whether with Robinhood or another brokerage.

Robinhood Retirement is an interesting new offering, and we’ll be excited to follow it and see how it does in the longer term.

This article is for informational purposes only and should not be construed as investment, tax or legal advice. Always consult a professional advisor for advice specific to your situation before making any major financial decisions, and never invest more than you can afford to lose. Thomas Smith holds a diversified investment portfolio that includes a variety of securities and cryptocurrencies.

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