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Robinhood wants to be your retirement fund, offering a 1% match

Robinhood, a stock-trading app that grew to become a favourite of the “meme-stock” crowd through the pandemic, has a new proposition: Open an Individual Retirement Account with the service and it’ll match 1% of the funds prospects contribute. 

The company, which is rolling out its new retirement financial savings program on Tuesday, mentioned it’s the solely IRA supplier to provide a match on investments — a function that’s typical in lots of employer-based 401(okay) packages. In such plans, an employer will sometimes match a employee’s 401(okay) contributions up to a restrict, typically between 3% to 6% of their annual wage. 

Such matches are sometimes solely obtainable as an employer-sponsored profit, and just one in 3 Americans has access to a company retirement plan, in accordance to Census information.

Robinhood is offering the match to anybody who opens an IRA by its service. The company is concentrating on the rising ranks of
gig employees,” contractors and part-time employees who are most likely to lack a company-sponsored retirement program, Steph Guild, Robinhood’s head of investment strategy, told CBS MoneyWatch. 

“Growing disconnect”

Matches have been proven to be highly effective behavioral levers that persuade folks to save more for retirement.

“The way we are working and living is changing,” with Americans extra doubtless to be gig employees or to maintain a number of jobs on the identical time, Guild mentioned. “That means there is a growing disconnect with the way savings are set up with the way people live and work.”

Robinhood’s buyer base, which has a median age of 32, could not have the identical entry to employer-sponsored packages as older Americans. “We see the need for our own customer base for this,” Guild added.

The buying and selling app’s matching contribution implies that somebody who places the utmost into an IRA — $6,000 for 2022 — will obtain a $60 match. That could appear small, however analysis signifies that the lure of a match, regardless of how modest, can persuade folks to save for retirement, Robinhood mentioned.

“There is interesting data on 401(k) matches that shows if a company offers a match, the rate of savings and participation goes way, way up, but there isn’t a correlation between the percentage match offered and the percentage of participation,” famous Sam Nordstrom, lead product supervisor for Robinhood Retirement.

There is a caveat to Robinhood’s match, nevertheless: You’ll have to hold the retirement funds with Robinhood for no less than 5 years to hold the match. The thought is to align retirement financial savings with a long-term view, the company mentioned.

If you withdraw the money earlier than 5 years, you may have to forfeit the match. For occasion, somebody who invests $5,000 and will get a $50 match, however then withdraws $2,500 earlier than 5 years is up, would hand over $25 of that match. 

Traditional and Roth IRAs

The program will provide each conventional and Roth IRAs, which give various kinds of tax advantages. Traditional IRAs enable folks to sock away money on a pre-tax foundation, however they will ultimately pay taxes on the funds after they withdraw it later in life. 

Roth IRAs make investments after-tax {dollars}, however traders can then withdraw the money on a tax-free foundation in retirement — a technique that’s typically really helpful for youthful traders since their tax rate could be decrease earlier of their career whereas their earnings are decrease. 

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Robinhood is offering each conventional IRAs and Roth IRAs as a part of its new retirement program, which gives a 1% matching contribution.

Robinhood


Once a buyer funds an IRA, traders can choose their very own shares or ETFs, or choose a really helpful choice of funds that meets a particular danger and funding profile. 

Robinhood mentioned it can earn money from its new product by stock trades, related to how its fundamental buying and selling app generates revenue by rebates from market makers and from sources reminiscent of curiosity from money. 

So-called fee for order movement, the place Robinhood takes buying and selling orders and sells them to bigger buying and selling corporations that execute the transactions, drew the eye of regulators in 2020, which claimed the app didn’t adequately disclose its business mannequin to prospects. 

Robinhood now outlines the way it earns money on its website. The company declined to say how a lot it forecasts it might spend on the 1% match within the subsequent year.

“Each person, whether a gig economy worker or not, needs to take care of themselves” for retirement, Guild mentioned. “This product is the first of its kind that is trying to get people to think about it as early as possible.”

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