The UK’s stocks and shares Individual Savings Account (ISA) is the equivalent of the USA’s Roth IRA. The ISA was offered by the UK government to its population as an incentive for them to increase their savings and build wealth throughout the nation.
The key advantage of the Individual Savings Account and its USA counterpart, the Roth individual savings account, is that they are tax-free, which allows earnings to grow quicker than with regular savings accounts.
The term “individual savings account” is somewhat misleading, however, because although many ISAs are most certainly savings accounts, a number are in fact investment accounts. The best way to view an ISA is to consider it as a “wrapper” around another type of account.
A person can invest in cash or cash equivalents within an ISA (just ensure you know what the best cash ISA rates are), or choose a stock and shares account, which invests in the equity markets. This type of account is an ideal way to build wealth, particularly if the money can be left for a period of five or more years.
UK stocks and shares ISAs are more flexible when compared with the individual savings accounts. With a stocks and shares account, money builds very quickly, due to the income and capital gains tax exemption rules surrounding the account.
Those ISAs, which are genuine savings accounts, are correctly categorised ‘cash ISAs’. These accounts function in an identical fashion to any standard savings account, in that you deposit money into an account held by a financial institution and they pay you interest.
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Positive aspects and possible downsides
A beneficial aspect to a savings ISA is that any interest earned is paid tax-free. A potentially negative aspect of the savings ISA is that there is a maximum amount of money that you are allowed to deposit into a cash ISA in any 12 months.
Investment ISAs that are typically called stocks and shares ISAs allow you to invest in exchange traded funds, unit trusts, individual company shares and bonds. Individual company shares function as unit trusts do, in that the value of your money fluctuates with the market and may go down as easily as it went up.
Any capital growth in a stocks and shares account is paid out to you tax-free, but once again, there is a maximum limit to the amount of money that a person is allowed to invest in any 12 months.
Regardless of a person’s earnings, anyone older than 18 years can open an ISA account and thereby receive best cash ISA rates.
Only choose an ISA stocks and shares account, if you can leave your money in the account for a minimum of five years. If you will require this money at an earlier stage, choose an individual savings account instead as less penalties and fees apply for early withdrawal.
Always attempt to minimise risk when dealing with stocks and shares by spreading your equity investments across various shares and even across various countries.
Stocks and shares in the ISA may be “Growth ISAs”, which are designed to offer gradual growth on your money over time. “Income ISAs” deliver a regular dividend through buying and selling shares on a more frequent and ongoing basis, to take advantage of each dividend payout. Growth ISAs typically have less short-term variation than the income ISAs.
If you want to invest your own money in the stock market, check out our article on the top 3 online brokerage: Webull vs eToro vs M1 Finance: Commission free trading
Who offers Roth IRA's
They are a couple of really good offers online for Roth IRA's in the USA. I'm going to run through two that I know the most about, but please do you own research to find out what is best for you.
Our first place pick for opening a Roth IRA is M1 Finance. This is a cutting edge brokerage account that is offering 100% fee free retirement accounts.
M1 Finance offers retirement accounts, including the Roth IRA, for a minimum balance of just $500. Through M1 Finance, you have many investment options. First of all, you can build your own custom portfolio from scratch with whatever stocks or ETFs you would like to invest in. Or, you can invest in one of the Expert Pies being offered by M1 Finance. These are portfolios built by leading financial experts, offered completely free! This includes TDFs or target date retirement funds, an ideal pick for a Roth IRA. These funds automatically change the allocations as you age to ensure that you are not too conservative or aggressive with your investments. As of now, M1 Finance is the only brokerage out there offering 100% fee free retirement accounts.
Another feature M1 Finance has for its account holders is passive investing, where you chose your risk threshold, whether it be cautious or adventurous. Then M1 Finance will recommend different investment portfolios that suit your needs. 100% free and 100% passive investing.
Second on this short list is Betterment. This is more of a passive savings account as all the hard work is done by technology. That means it comes with a small cost
For those who do not want to build a portfolio from scratch, this could be a perfect option. Most financial advisors out there charge a 1% annual asset management fee to manage your investments. Betterment is a roboadvisor, meaning it is technology driven. The savings are passed along to you in the form of a 0.25% annual asset management fee. With Betterment, you will be getting a 100% customized portfolio tailored to your specific needs and investment goals.You can also take advantage of a feature Betterment offers called the Tax Coordinated Portfolio, which has resulted in some serious tax savings for Betterment investors.
Who offers Stocks & Shares ISA's
Most banks and building societies can offer stocks and shares ISAs so you should investigate who offers the best rate at the time in the market. The only alternative to going to a bank is to checkout Wealthify, another roboadvisor which is the UK's alternative to Betterment.
Using Wealthify your money will be invested in several funds, which are a collection of investments and therefore offer cost-effective exposure to global financial markets. Wealthify differs from its competitors slightly in that the company uses ETFs and mutual funds, both of which are low-cost and passive investments. In 2017 Wealthify released these figures: The one year performance of each plan are as follows - Adventurous (28.5%), Ambitious (22.25%), Confident (18.28%), Tentative (11.86%), Cautious (8.86%).
I personally use MoneyBox because it's easy and allows you to invest your spare change. The flexibility of MoneyBox is fantastic, you can invest as much or as little as you want per month, and you can withdraw any money held in the account at any time. The returns for a standard stocks & shares ISA through MoneyBox is between 2%-12% depending on your risk level. Unlike Wealthify, MoneyBox only offers a 3 tier risk level format.
Breakdown of a Roth IRA
Tax free retirement income: The biggest difference between a traditional IRA and a Roth IRA is the tax savings. With a Roth IRA you might have to wait longer to withdraw your money, but the amount you save in tax will pay off.
Easier access to money: The money you put away for retirement is meant to stay untapped until that day comes. But with current financial needs you may need it earlier than expected. Withdrawals from a traditional IRA before the age of 59+½ comes with a tax bill from the IRS and a 10% early withdrawal fee. You can avoid all of this with a Roth IRA.
Almost anyone can contribute: A Roth IRA has a threshold of $118,000. If your yearly income is above the eligibility limit you can not open a Roth IRA… Or can you? With a little fancy footwork, an existing traditional IRA can be converted to a Roth IRA, you should seek advice from your bank manager about the details as tax may need to be paid on the contributions.
For more on this topic you can check out our latest article: What is a Roth IRA, and why you should invest in one!
Breakdown of a Stocks & Shares ISA
Tax free dividend income: The stocks and shares ISA allows you to invest your money into a savings account that is then invested into stocks and shares, hence the name. This is good because you earn more than the standard bank interest rates, you earn an average percentage growth based on how the market is doing, meaning there is a possibility of you earning more money.
UK ISA allowance: In the 2019/20 tax year in the UK the ISA allowance was £20,000. Meaning you could only invest £20,000 in that year. This is likely to change each year but if you have more than £20,000 worth of savings you should seek other options.
Invest in whatever you want: With a stocks and shares ISA you can invest in unit trusts, shares, investments trusts, exchange-traded funds, index funds, government bonds, and corporate bonds. You can diversify your investments to protect your money and reduce risk. However, check with your bank as some providers may not hold all of these options.