Robinhood is now offering Retirement accounts. There’s a 1% match for every dollar you contribute.

Robinhood is not the first financial institution that offers individual retirement accounts or IRAs. Robinhood may be the first financial institution to offer non-employer IRAs that have a match on your contributions. This is something typically offered only through employer-sponsored plans.

>> Do you need a review? Find out more about IRAs.

These new accounts could make a huge difference for millions of Americans. Bureau of Labor Statistics data earlier this year shows that 28% of workers do not have access to a company-sponsored retirement plan.

Some investors may be curious about how an IRA that is not run by an employer can offer matching contributions.

Who is eligible to set up a Robinhood IRA.

Two requirements are required to set up an IRA with Robinhood. Investors must have earned income, and a Robinhood account.

Only people who have earned income can contribute to IRAs. This is income earned from work and not passive income from property or investments.

To sign up for a Robinhood IRA, you must also be eligible for a regular, taxable Robinhood brokerage accounts. To sign up for a Robinhood IRA, you must be at least 18 and have a U.S. citizenship, lawful resident, or visa holder, as well as a U.S. mailing address.

Robinhood IRA requires that you open a taxable brokerage account in order to create a login. To open an IRA, you don’t have to use a taxable account.

What types of investments and accounts are available?

We offer Roth and traditional accounts. Robinhood’s head of product management Sam Nordstrom says customers can choose to have both Roth and traditional accounts.

Nordstrom states that Robinhood IRAs allow for “the whole range of recognized contribution types,” which includes traditional IRA contributions as well as Roth contributions.

Anybody with earned income can contribute to a Traditional IRA. However, the tax deduction for traditional IRA contributions will gradually be phased out as income grows. Roth IRAs are not available to those with high incomes.

Nordstrom claims that all stocks and exchange-traded fund (or ETFs) available in a regular Robinhood account can also be found in a Robinhood IRA. Options trading and cryptocurrency trading are not yet available in IRAs.

He stated that Robinhood will support options trading in IRAs, but not cryptocurrency trading.

What are the special features of Robinhood IRA?

The Robinhood IRA offers three unique features not found in other non-employer IRAs. These are instant deposit, matched contributions, and investment recommendations.

Instant deposit

You won’t need to wait for your deposits to clear like Robinhood’s regular accounts. Instead, you can start investing immediately. Customers can make “instant deposits” which allows them to deposit up to $1,000 immediately and to buy stocks or ETFs using it, provided that markets are open.

This is possible in a regular Robinhood account by using margin, which is not allowed for IRAs. Robinhood IRAs instead use “limited margin”, which is essentially a short-term interest-free loan equal to the amount of the unspecified deposit.

Nordstrom states that customers who make instant deposits that don’t clear due to insufficient funds or other reasons will be subject to a negative balance. They will need to make another deposit to balance their account.

They may have their trading or funds restricted if they do not comply.

1% Match

The most distinctive feature of Robinhood IRA is the contribution-match feature. This feature is a first among nonworkplace retirement accounts.

You can have 1% of all eligible contributions matched into your account. Nordstrom states that you don’t have to be employed to do this.

The match applies to all contributions above the annual IRA contribution limit of $6,000 (or $7000 if you are 50 years old or older) in 2022. In 2023, the contribution limit will rise to $6,500 (or $7,500 for those 50 years or older).

You can invest immediately with the matching funds. If you make a $100 deposit during market hours, and have an instant deposit turned on at the same time, you can purchase $101 of stocks that day.

However, there is a catch. You can only keep the matching money if the money has been in your Robinhood IRA at least five years.

Nordstrom states that if you have to withdraw money before five years, we will return the match you withdrew.

Recommend portfolios

Robinhood IRA has a robo-advisor feature similar to that of a robo-advisor. This allows customers to recommend ETF portfolios.

Stephanie Guild is a chartered financial analyst who serves as Robinhood’s director for investment strategy. She says Robinhood divides portfolios between bond and stock ETFs to fit customers’ retirement plans. This also minimizes expense ratios (the percentage charges by ETF managers).

“We go all-the way up to 100% equity — but down to 30% equity, 70% fixed income,” Guild said. This refers to portfolios that are more equity-heavy for younger customers and more bonds-heavy for older customers.

She says that the average expense ratios of portfolios range from 0.04% to 0.05%.

Customers have the option to invest in recommended portfolios or pick their stocks and ETFs.

How can Robinhood make money with its IRAs.

Nordstrom claims that Robinhood will make money with IRAs in the same way it makes money with regular accounts. This includes routing customer orders through trading companies (payment for order flow), collecting interest and lending stocks.

Robinhood does not charge IRA customers any fees or commissions.

Nordstrom believes features like the 1% match and a minimum five-year holding period make Robinhood’s business sense because they increase customers’ investment — and their time invested. This means Robinhood will generate more revenue.

He says, “We believe that [customers] will stick with us for the long-term and it’ll end in a good deal both ways.”

Critics of payment for order flows argue that it creates conflicts of interest. It encourages brokers to execute customer orders through trading firms that pay them most, not necessarily those that execute trades at the fastest speed or for the highest prices.

A study done by the CFA Institute in 2016, which oversees the title of chartered financial analyst, is an example.

The study found that UK brokers were more likely than ever to execute customer trades at the best prices, after the Financial Services Authority in 2012 effectively stopped payment for order flow.

These effects are usually too subtle to notice for most investors, especially long-term, hold-on-to-investors.

If you are a day trader who is very active, however, the cost of order flow-related pricing or timing problems could make a significant impact on your return. These traders might want to work with a broker that does not charge for order flow.

When are Robinhood IRAs going to be available?

Robinhood IRAs are now open for business. The waitlist will close Dec. 6, 2022. Robinhood is also offering early access to customers through a referrals program.

Nordstrom claims that customers can access a Robinhood IRA within 24 hours if they sign up for the waitlist and refer a friend using a custom referral code.

He said that Robinhood would slowly roll out the product beyond the waitlist, which will continue through December.

The bottom line for the new Robinhood IRA

Robinhood IRAs that offer matched contributions may be a useful tool for self-employed Americans or those who work in gig economies.

As with all financial products, potential customers need to carefully read and fully understand the terms and conditions of Robinhood IRA’s unique perks. These include the minimum holding period of five years to retain the matching funds, the rules for instant deposits, as well as the ways Robinhood will make money from IRA customers.