A Robinhood retirement nest-egg. It feels strange as it rolls off your tongue, but that does not mean it is not real. The retail brokerage firm is offering retirement accounts to its customers as the trading euphoria that helped it survive the pandemic wanes.
The company has promised customers that it will match their contribution with 1% of the amount they invest in their traditional or Roth IRA accounts, until they hit their annual limit. Such matches are usually only offered by established companies who match a worker’s 401(k) contributions up to a limit, typically between 3% to 6% of their annual salary.
The Robinhood Retirement Dream
The Robinhood retirement plan is a genius move by the financial services company that is reportedly bleeding customers. It had only 12 million active users by Q3 of 2021, an all-time low for the brokerage firm.
The company is hoping to attract young professionals and break into an established market by offering guaranteed 1% returns. The scheme is available only to those who open a Robinhood retirement account.
Robinhood Inc. is mainly targeting the growing ranks of gig workers, contractors, and part-time workers, Steph Guild, Robinhood’s head of investment strategy, told CBS MoneyWatch.
Guild admitted that the company is focusing on these workers as the American economy is changing. Many people are holding two or more jobs at a time. He goes on to say, “That means there is a growing disconnect with the way savings are set up with the way people live and work.”
For 2022, the Internal Revenue Service (IRS) has set a cap of $6,000 for individual retirement contributions, which means that the company could end up paying $60 max per account.
The offering has a catch – you need to set up your retirement account with Robinhood for at least five years. In case you decide to withdraw before your term, you will have to forfeit the gains. The company is clearly looking to attract long-term customers and give them savings benefits while growing the firm.
According to Census data, employer matched retirement accounts are only available to one in three Americans.
“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,” revealed Sam Nordstrom, lead product manager for Robinhood Retirement.
Retirement account benefits
Traditionally, retirement accounts have different types of tax benefits. Employee retirement plans can vary from entrepreneur retirement plans. With the Robinhood retirement account, both traditional and Roth IRAs are accessible to customers.
- You can contribute to a traditional retirement account pre-tax or post-tax. For the Roth IRA, you contribute your after-tax dollars.
- Traditional IRA accounts are not taxed until you withdraw some amounts from your account. Roth IRA contributions and earnings tax-free and penalty free after you cross the age of 59.5 years.
- Traditional IRAs are great for people with average income and if you are expecting to earn less in the future. With a Traditional IRA, your money can grow tax deferred, but you must pay income tax on your withdrawals, and you must take distributions after the age of 72.
- On the other hand, Roth IRAs are a much more attractive savings vehicle as the contributions made into the account are usually done post-tax. Roth IRAs let you pay tax on the money going into the account, making withdrawals tax-free.
The Robinhood retirement account hopes to lock in flighty customers while providing them with instruments to save for their future.
