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It’s no secret that I absolutely love the Acorns investment app. I personally use it to manage my own investment portfolio, regularly recommend it to friends and family, and write about it occasionally on this site (check out these articles on how Acorns users make money with the app and to learn more about the Acorns Found Money feature). Honestly, what’s not to love about an investment app that’s completely free for college students?
However awesome Acorns is, it has had one major flaw since it came out a few years ago: It didn’t offer any retirement account options. Why is that such a big deal? For a couple of reasons.
First of all, retirement is one of the most common things that the average person invests for. It’s just one of the essentials of life: If you want a comfortable retirement, you’ve got to start investing as soon as possible to reach your goal. And to help encourage you to do that, the government has created retirement account options—401ks, 403bs, and IRAs—that come with some really nice benefits. The big one? They’re taxed differently. They’re taxed in a way that can save you a lot of money. The fact that the Acorns App didn’t let you take advantage of these tax savings was a big problem, especially if retirement is the only thing you can afford to invest for.
But all of that is about to change. Acorns announced at the end of 2017 that it had acquired Vault, a retirement savings app that allowed you to open, contribute to, and manage an Individual Retirement Account (IRA). That means that very soon, Acorns users will have the option to open either a personal investment account (aka, your current Acorns account) or a retirement account.
Retirement Savings Basics
When you open a regular investment account, you are doing so with after-tax money, since you’ve already paid income taxes on it. Then, when you you withdraw the money from your investment portfolio in the future, you pay taxes on the profit. This is called the “capital gains tax.”
When it comes to retirement investment accounts, the way you pay taxes on your money is different. Exactly how different depends on the type of account you have.
With a traditional 401k, 403b, or IRA, you contribute money to your retirement account with pre-tax money. This lowers your taxable income for the year. Then, when you withdraw the money in retirement, you pay income tax on it—but no capital gains tax.
With a Roth 401k, 403b, or IRA, you contribute after-tax money to your retirement account. This means that your taxable income for the year isn’t lowered like it is with a traditional retirement account. The tradeoff for paying your taxes upfront? In retirement, when you withdraw money from your Roth account, you do so completely tax free. You don’t pay income tax or capital gains tax.
Whether you choose a traditional or Roth retirement account is a personal financial decision to make, and there are a lot of factors to consider. Before making a decision on which you should be using, I’d recommend talking to a tax professional. That being said, I contribute to a Roth account because I like the idea of knowing that I won’t have to pay taxes on my money in retirement. It gives me a sense of certainty that is valuable for me.
For more information about the differences about various retirement accounts, check out the section on “Types of Investment Accounts” in our College Student’s Guide to Investment Terms.
401ks and 403bs are only available through employers, so if your employer doesn’t offer one, or you’re self-employed or a student, you’ll need to open an IRA to begin saving for retirement. This is where Acorns Later comes into play.
How Does Acorns Later Work?
The app is not yet rolled out to users, so we’re a little light on specifics. Below I outline some of the basics of how the app will work based on information provided by Acorns, but I’ll update as more details become available.
Acorns Later will allow you to open an Individual retirement account (IRA). You’ll be able to either contribute to the account manually (make investments to the account whenever you wish) or automatically (have the investments taken straight out of your paycheck. Like the original Acorns app, you can start investing in Acorns Later with as little as $5.
Just like regular IRAs, you’ll be subject to yearly contribution limits. This means that anyone under 50 years old can contribute up to $5,500 a year to their IRA and anyone over age 50 can contribute up to $6,500. Based off of a promotional screenshot from their website, the app will show you how close you are to hitting your limits, which will be really helpful.
(It’s important to note that this limit is the total between all IRAs that you have. That means if you have 3 separate IRAs, you can only contribute a total of $5,500 between them all, not $5,500 to each.)
Vault offered both traditional and Roth IRAs, so it is safe to assume that Acorns will also offer both options.
A key difference between money in an Acorns account vs. money in an Acorns Later account is how accessible the money will be to users. If you have an Acorns account, you can take the money out at any time (though you’ll pay taxes on any profit you make).
With an Acorns Later account, you can still withdraw your funds at any time, but if you do so before you are retirement age you will likely be subject to some pretty hefty fines. For that reason, any money in your Acorns Later account (or any other IRA) should be reserved solely for retirement. Make sure you’ve got some emergency savings set aside to keep from tapping into your IRA!
Acorns Later Fees: How Much Does Acorns Later Charge?
The pricing model for Acorns Later was finally released in April 2018. According to the updated fee schedule, Acorns users are now charged $1 per month on portfolios up to $1,000,000. If Acorns users would like to opt into Acorns Later for retirement savings, they will be charged a total of $2 per month on portfolios up to $1,000,000. (And, for $3 per month users will also gain access to an as-of-yet-unannounced 3rd service.)
What about accounts worth more than $1,000,000? That isn’t clear just yet. Originally, accounts worth more than $5,000 were charged a fee of .25% annually. I would expect the fee to be around there on accounts worth over $1 million, but I could be wrong.
Questions Still to Be Answered
Other details about functionality are a little vague at the moment. Questions that remain to be answered include:
- Can Acorns customers use the round-up function paired with their Acorns Later account? What about Found Money or referrals? We don’t know yet.
- What will the portfolios look like? Will they be similar to the current Acorns portfolios (Conservative, Moderately Conservative, Moderate, Moderately Aggressive, Aggressive), or will they be structured differently, perhaps as target-date funds?
The Bottom Line
Whether you’re a current college student, a graduate, or just someone looking to get started investing, Acorns and Acorns Later are both great tools that you should consider adding to your arsenal. That being said, if you’ve got an employer-sponsored 401k that comes with any sort of employer match, you should absolutely contribute to that account, at least up until you’ve claimed all of your employer match. (It’s free money, after all!)
Ultimately, even though there are some unanswered questions right now, Acorns Later is going to be a great thing for current Acorns customers and for new investors who specifically want to start saving and investing for retirement. If you’re interested in starting investing (and you really should!) I highly recommend that you give Acorns a try.