What You Need to Know About the New Robinhood IRA

Retirement accounts are coming to Robinhood — with a 1% match on every dollar contributed.

Robinhood is far from the first financial institution to offer individual retirement accounts, or IRAs. But it may be the first to offer non-employer IRAs with a match on contributions — something that’s typically only available through employer-sponsored plans.

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The new accounts could be a game-changer for tens of millions of Americans. According to Bureau of Labor Statistics data from earlier this year, 28% of workers lack access to an employer-sponsored retirement plan.

But some investors might be wondering how a non-employer IRA can offer matching contributions, how the accounts work, and who’s eligible for them.

There are two main requirements for setting up an IRA at Robinhood: Investors must have earned income and a Robinhood account.

The IRS allows only people with earned income to contribute to IRAs — that is, income from work, as opposed to passive income from investments or property.

You also need to be eligible for a regular, taxable Robinhood brokerage account to sign up for a Robinhood IRA. That means you need to be at least 18 years old and a U.S. citizen, lawful resident or visa holder with a valid Social Security number, and a U.S. address.

There is currently no way to create a Robinhood login without opening a taxable brokerage account, so that’s another requirement for the Robinhood IRA. But you don’t need to use the taxable account to open an IRA.  

“We offer two different account types — Roth and traditional. Customers can do both if they want to,” says Sam Nordstrom, the head of product management at Robinhood.

Nordstrom says that Robinhood IRAs support “the full range of recognized contribution types,” including both deductible and non-deductible traditional IRA contributions, Roth contributions and rollovers.

Anyone with earned income can contribute to a traditional IRA, although the tax deduction from traditional IRA contributions is gradually phased out at higher incomes. People with high incomes may be ineligible to contribute to a Roth IRA.

Nordstrom says that all of the stocks and exchange-traded funds, or ETFs, available in a regular Robinhood account are also available in a Robinhood IRA. However, options trading and cryptocurrency trading are not available in IRAs yet.

He says that Robinhood plans to support options trading in IRAs in the future, but not cryptocurrency trading.

The Robinhood IRA comes with three features that are uncommon in other non-employer IRAs: instant deposit, matched contributions and investment recommendations.

As with Robinhood’s regular accounts, you won’t have to wait one to five business days for deposits to clear before you start investing. Customers can enable “instant deposits,” which allow them to contribute up to $1,000 and buy stocks or ETFs with it immediately, assuming markets are open.

In a regular Robinhood account, this is made possible by the use of margin — which isn’t allowed for IRAs. Instead, Robinhood IRAs use something called “limited margin,” which is basically a short-term, interest-free loan in the amount of the uncleared deposit.

Nordstrom says that if a customer makes an instant deposit that doesn’t clear because of insufficient funds or some other reason, they will incur a negative balance and will have to make another deposit to bring their account balance out of the red.

If they fail to do this, their account may be restricted from moving funds or trading.

Perhaps the most striking feature of the Robinhood IRA is its contribution-match feature — a first among non-workplace retirement accounts.

“You can get 1% of all of your eligible contributions matched into the account. You don’t need an employer to do this,” Nordstrom says.

The match applies to all contributions up to the annual IRA contribution limit, which is $6,000 ($7,000 if you’re age 50 or older) in 2022. The contribution limit will increase to $6,500 ($7,500 if you’re age 50 or older) in 2023.

The matching funds are available to invest right away. So if you deposit $100 during market hours and you have instant deposit turned on, you can buy $101 worth of stocks that same day.

But there’s a catch: you can only keep the matching funds if you hold the money in your Robinhood IRA for at least five years.

“If you need to take money out before five years … we will take back the corresponding amount of match that you withdrew,” Nordstrom says.

The Robinhood IRA also comes with a robo-advisor-like feature that can recommend portfolios of ETFs to customers.

Stephanie Guild, a chartered financial analyst and Robinhood’s director of investment strategy, says that Robinhood allocates the portfolios between stock and bond ETFs in a way that fits customers’ retirement time horizons, while also minimizing expense ratios (the percentage fees charged by ETF managers).

“We go all the way up to 100% equity — and down to 30% equity and 70% fixed income,” Guild says, referring to more equity-heavy portfolios for younger customers and more bond-heavy portfolios for older customers.

“The average expense ratios for the various portfolios are between 0.04% and 0.05%,” she says.

Customers can invest in recommended portfolios, pick their own stocks and ETFs, or do a little of both.

Nordstrom says that Robinhood will make money from IRAs the same way that it makes money from its regular accounts. That includes routing customer orders through trading firms (payment for order flow), collecting interest on uninvested cash, and lending out stocks.

As with its brokerage and crypto accounts, Robinhood will not charge IRA users any fees or commissions.

Nordstrom says features such as the 1% match with a five-year minimum holding period make business sense for Robinhood because they’ll increase the amount of money customers invest — and the length of time they stay invested. That means more revenue for Robinhood.

“We think that if [customers] stick with us over the long run, it’ll end up being a good deal for both sides,” he says.

However, critics of payment for order flow say that it creates a conflict of interest. They say it incentivizes brokers to execute customer orders through the trading firms that pay them the most — not necessarily the firms that execute trades fastest or at the best prices for the customer.

For example, a 2016 study by the CFA Institute, which oversees the chartered financial analyst title^[0]

For most investors — especially long-term, buy-and-hold investors — these effects are generally too small to notice.

But if you’re a very active day trader, payment for order flow-related pricing and timing disadvantages could put a small dent in your returns. Those traders may want to consider working with a non-payment for order flow broker instead.

The waitlist for Robinhood IRAs opens Dec. 6, 2022 — and Robinhood is offering customers early access through a referrals program.

Nordstrom says that customers can get access to a Robinhood IRA “within 24 hours” if they join the waitlist and bring someone else onto the waitlist using a custom referral link.

He says that Robinhood will be slowly rolling the product out beyond that waitlist through the month of December.

The new Robinhood IRAs with matched contributions could be useful tools for the growing number of Americans who are self-employed or work in the gig economy — forms of work that don’t come with employer-sponsored retirement plans.

However, as with any financial product, potential customers should make sure to read the fine print and understand the conditions that come with the Robinhood IRA’s unusual perks. These include the minimum five-year holding period to keep the matching funds, the rules around instant deposits, and the ways in which Robinhood will make money off of IRA customers.