Bank IRAs looks like convenient ways to save on the surface. Just open an account with the bank your currently use and keep your retirement savings and day-to-day cash in the same place. But should you use a bank IRA, like an IRA savings account or IRA certificate of deposit (CD) for your retirement savings goals?
If you’re an extremely conservative investor or very close to retirement, a bank IRA might be the ideal call. However, most savers will find that a standards retirement brokerage account will be the better option.
How much would you like to invest?
Bank IRAs offer limited, low-yield investment options, typically savings accounts or certificates of deposit (CDs). However, they do offer a few advantages for some retirement savers.
Bank IRAs are ultra-safe investments. If you open one at a Federal Deposit Insurance Corporation (FDIC)-accredited institution, the funds you save in an IRA savings account or IRA CD receive deposit insurance up to the legal limit. Even if the bank were to fail, you wouldn’t lose the funds saved in your IRA. This is the right place to park your retirement cash if you’re super risk-averse.
A bank IRA can offer a tax advantage, too. Say your tax preparer tells you on April 14 that you need to make an IRA contribution to get a better tax refund. If you have money in your savings account, you can open an IRA savings account at your bank using those funds and get the tax refund you deserve.
However, all bank IRA options traditionally offer very low rates of return. You’ll likely need a higher rate of return to meet your savings goal.
A bank IRA savings account offers you a tax-advantaged way to save for retirement by stashing cash in a savings account in either a traditional IRA or Roth IRA. With a traditional IRA, your contributions may be tax deductible, and you’ll be taxed on all withdrawals. With a Roth IRA, your contributions are post-tax, and your withdrawals — including earnings — are tax-free.
An IRA savings account pays interest, and that interest compounds until you can withdraw your funds penalty-free at age 59 1/2 or older. That said, interest rates on bank IRA savings accounts are typically lower than the returns you could get in the stock market.
Speaking of bank IRA savings account interest rates, here’s what you’re looking at in the current market:
|Account||Minimum opening deposit||APY|
|Latino Community Credit Union IRA Share Account (Traditional, Roth, SEP)||$25||2.02%|
|Communitywide FCU IRA||$2,000||0.80%|
|Signature Federal Credit Union IRA Savings (Traditional, Roth, CESA)||$0||0.75%|
If you’re already a customer at the bank where you want to open a bank IRA, opening an account may be as easy as logging into your online banking system, checking a few boxes and funding the account with a deposit from your bank account. If you’re not already a customer at the bank, you may need to go through an application process and connect a bank account to fund your bank IRA.
A bank IRA certificate of deposit (CD) offers another tax-advantaged retirement savings vehicle — but with slightly higher interest rates. You’ll tend to earn a higher interest rate than a savings account since you agree to keep your cash on deposit for the length of the CD’s term, whether that’s six months, one year or five years. Generally, the longer the term, the higher the interest rate.
As with IRA savings accounts, you can open various types of IRA CDs, including a traditional IRA, Roth IRA, or SEP or SIMPLE IRA.
If you’re a bank customer, opening an account may require logging in, confirming your information and funding the account with a deposit from your bank account. If you’re not a bank customer, you may have to enter your personal information, choose an account type and set up a deposit from your bank.
Here are the current rates offered on bank IRA CDs:
|BethPage FCU||3 months||2.25%|
|INOVA FCU||6 months||0.85%|
|Paramount Bank||12 months||2.25%|
|INOVA FCU||18 months||1.45%|
|MAC Federal Credit Union||2 years||1.50%|
|America’s Credit Union||3 years||0.60%|
|Credit Union of the Rockies||4 years||2.60%|
|American 1 Credit Union||5 years||4.06%|
|Evansville Teachers FCU||6+ years||4.30%|
Because you’re investing your retirement cash for the long-term — and hoping to eventually have enough to comfortably stop working — you need higher returns than you’ll get at a bank. This is why you probably want to open an IRA at a brokerage.
With an IRA brokerage account, you’ll enjoy a much wider array of investments which can offer higher potential rates of return than bank IRAs. Let’s have a a deeper look.
Since 1928, the S&P 500 has had an average annual return of 11.57%. Historically, non-savings account assets have performed more favorably than savings accounts over the last 15 years:
Here’s how it breaks down:
If a 35-year-old deposited $1,000 into an IRA and added $1,000 each year until age 65, here’s how the two accounts would compare:
|Account||Assumed annual return||Balance at age 65|
|Bank IRA savings account||2.00%||$48,163|
|Well-diversified stock portfolio in a brokerage IRA||7.00%||$112,019|
Still feeling ultra conservative? Brokerage IRAs also have conservative investment options, such as bonds and money market funds. Plus, brokerage accounts offer SIPC insurance on up to $500,000, often with secondary insurance on amounts above that. However, keep in mind that SIPC insurance only covers $250,000 in cash. If you sell assets in your brokerage IRA, consider reinvesting your cash in a money market mutual fund which offers conservative returns and low risk while also keeping your cash-like assets insured.
If you need help choosing a brokerage account for your IRA, we’ve done the hard work for you. We vet the best Roth IRA accounts and best Traditional IRA accounts monthly so you can start saving with confidence.
The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.