Capital One vs. Interactive Brokers: Finding the Best IRA Broker

By Jordan Wathen Markets Fool.com

Individual retirement accounts can be an excellent way to save for retirement. Some offer tax-free growth (Roth) while others are tax-deferred (traditional IRAs), but all of them offer more choice in how you invest for the future. If you've ever been puzzled by the limited choices in a 401(k), you'll be pleasantly surprised with all the choices after you open an IRA.

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But not all brokers are created equal for IRA investors. Let's take a look to see how popular services like Capital One and Interactive Brokers compare for retirement accounts.

Commission prices and trading costs

These two brokers have vastly different commission schedules. Capital One's commissions are mostly fixed, whereas Interactive Brokers' commission prices are variable based on the size of your trade. We'll summarize the differences in the following table, which breaks down commissions by investment.

Brokerage

Stocks and ETFs

Stock Options

Mutual Funds

Capital One

$6.95 per trade

$6.95 + $0.75 per contract

$19.95 per purchase

Interactive Brokers

$0.005 per share ($1.00 minimum)

$0.25 to $0.70 per contract ($1.00 minimum)

$14.95 per purchase

Data source: company websites.

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Depending on your needs, either broker may have the better deal for you. In addition to their standard prices, both have alternative schedules with lower pricing. Trades that aren't time-sensitive can be sent through Capital One's ShareBuilder service for just $3.95 each. Interactive Brokers' tiered commission schedule allows investors to pay less per trade depending on their monthly trading volume.

But in either case, you'd be wise to check out each brokers'special offers for IRAs before opening an account. Special offers frequently include lucrative cash bonuses worth up to $2,000, which can significantly reduce your actual trading cost.

Mutual fund selection and commission-free choices

While brokers generally offer similar access to the same stocks or ETFs, mutual fund selection can vary considerably from broker to broker. The following table shows how many mutual funds each broker has to offer, as well as how many are commission-free or no-transaction-fee.

Brokerage

Total Mutual Funds

No-Load, No-Transaction-Fee Funds (NTF)

Commission-Free ETFs

Capital One

More than 1,100

More than 400

Not available

Interactive Brokers

More than 8,200

More than 2,900

41 (Cambria, O'Shares, and more)

Data source: company websites and representatives.

Depending on how frequently you plan to rebalance your portfolio, or make additional contributions to your account, transaction fee-free mutual funds and ETFs may be more or less important to you. Consider that at about $15 or $20 per transaction, making a once-a-month investment in just one mutual fund would cost about $180 to $240 per year. Free mutual funds and ETFs help you avoid that expense completely.

Minimum deposit requirement for IRAs

This is where the two brokers diverge pretty meaningfully. Interactive Brokers requires that investors deposit a minimum of $5,000 to open an IRA account, whereas Capital One is a no-minimum brokerage. Interactive Brokers minimum is close to the limit for IRA contributions each year ($5,500 to $6,500 in 2016 and 2017).

Depending on the broker, you may have to nearly max out your annual contribution to an IRA to open an account. Image source: Getty Images.

International stocks and ADRs

Investing overseas isn't as tricky as it sounds. You don't need a Swiss bank account, or even a passport. Capital One and Interactive Brokers offer different levels of access to international companies that trade domestically, and on markets all around the world.

Type of Investment

Capital One

Interactive Brokers

American depositary receipts(ADRs)

Yes

Yes

Stocks traded on international stock markets

No

Yes (more than 100 markets)

Mutual funds and ETFs of foreign stocks

Yes

Yes

Data source: company websites and representatives.

Brokerages can typically be put into one of two categories: brokers that offer trading on non-U.S. exchanges (Interactive Brokers) and brokers that only offer the ability to invest in foreign companies through U.S. tickers (Capital One).

Luckily, virtually every broker allows trading in ADRs, which enables investors to invest in some of the largest and best-known companies around the world. As an example, Volkswagen AG and Sony both have ADRs that trade in the United States, making them available through most online brokers.

Mobile app reviews

Whether you're sitting in midtown Manhattan or on vacation in Italy, you can check your account and make trades from your mobile phone or tablet. Here's how each brokers' users and customers rated their mobile trading apps, as of Jan. 31, 2017:

Brokerage

Apple App Store

Google Play

Capital One

3.0 stars

3.0 stars

Interactive Brokers

2.5 stars

4.0 stars

Data source: relevant app stores.

IRA fees: Maintenance and inactivity fees

Like commissions, fees can add up. Unlike commissions, they can be hard to spot. While a broker could theoretically charge a fee for any service in your IRA, there are two fees to pay particular attention to. The first fee is the maintenance fee, or account service fee, which is charged to customers just for having an account (think monthly bank account fees). The second type of fee is an inactivity fee, or a fee you pay when you don't meet a minimum activity level in a given period of time.

Interactive Brokers charges an inactivity fee in the form of a minimum monthly commission of $10. Thus, in a month in which you generated just $6.50 in commissions, Interactive Brokers would assess a $3.50 fee to bring the total commissions to $10 during the period. Investors can avoid this fee by generating at least $10 in commissions each month, or by maintaining a balance of $100,000.Capital One doesn't currently have a maintenance fee or inactivity fee.

Capital One or Interactive Brokers for IRAs

Realistically, these two brokers cater to different kinds of investors. Interactive Brokers caters to high-volume traders with low commissions, and access to global markets, but its inactivity fees may make it less affordable for infrequent traders with small account sizes. Capital One offers reasonable commission prices (which goes double for its low-cost ShareBuilder program), but it doesn't offer as many funds or international investment opportunities as Interactive Brokers.

Ultimately, it's really all about how each broker fits within the confines of your portfolio. To be clear, The Motley Fool does not endorse any particular brokerage, but we can help you find one that is a good fit for you. VisitFool.com's IRA Centerto compare several brokers all on one page and see if you qualify for any special offers for opening a new account.

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Jordan Wathen owns shares of Interactive Brokers. The Motley Fool recommends Interactive Brokers. The Motley Fool has a disclosure policy.