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Opening an individual retirement account (IRA) with a credit union or a bank might be a good call, depending on your risk tolerance and investing goals. If you’re an extremely conservative investor, you’re very close to retirement or already retired, a bank IRA might be right for you. But for most retirement savers, the optimal place to invest is a brokerage IRA.
How much would you like to invest?
For most people, bank individual retirement accounts are not the best place to grow their retirement funds. Bank IRAs offer very 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.
There are tax strategies you can take advantage of with a bank IRA. If your tax preparer tells you on April 14 that you need to make an IRA contribution to get the most out of your tax return and you have money in your bank savings account, you can open an IRA savings account at that bank and move funds into the IRA in no time.
Keep in mind that bank IRA savings accounts and CDs traditionally offer very low rates of return. Most investors need a higher return on their retirement savings to meet their goals. The best place to get those higher returns is to open an IRA at a brokerage.
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 deductions are post-tax, and your withdrawals — including earnings — are tax free.
You may also be able to open other types of IRAs at a bank or credit union, such as a SEP IRA or SIMPLE IRA, which are accounts for self-employed people. And in some cases, you may be able to open a Coverdell Education Savings Account (formerly known as an Education IRA).
An IRA savings account pays interest, and the money accrues until you can withdraw it at age 59 1/2 or older. That said, interest rates are typically lower than the returns you could get in the stock market.
|Account||Minimum opening deposit||APY|
|Latino Community Credit Union IRA Share Account (Traditional, Roth, SEP)||$25||0.60%|
|Communitywide FCU IRA||$2,000||0.80%|
|Signature Federal Credit Union IRA Savings (Traditional, Roth, CESA)||$0||0.70%|
“We are in a period of low interest rates, and the outlook of those rates going up doesn’t look favorable,” said Thomas Rindahl, a certified financial planner in Tempe, Ariz. “Someone using savings or traditional CDs is facing the very real risk of losing purchasing power over time.”
If you’re a customer at that bank, opening an account may be as easy as logging in online, checking a few boxes and funding the account with a deposit from your bank account. If you’re not a bank customer, you may need to enter your personal information, choose an account and set up a funding deposit.
A bank IRA certificate of deposit offers another tax-advantaged retirement savings vehicle — but with slightly higher interest rates, because you agree to keep your cash in the certificate of 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.
|BethPage FCU||3 months||0.40%|
|INOVA FCU||6 months||0.20%|
|Paramount Bank||12 months||2.25%|
|INOVA FCU||18 months||0.30%|
|MAC Federal Credit Union||2 years||0.95%|
|America’s Credit Union||3 years||0.60%|
|Credit Union of the Rockies||4 years||2.60%|
|American 1 Credit Union||5 years||1.25%|
|Evansville Teachers FCU||6+ years||2.30%|
Although bank IRAs offer a safe place to put your retirement cash, they’re not the ideal savings vehicle for most investors. 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.
“I think of the bank as the place where you have your emergency funds — and I don’t particularly care about low returns on emergency funds, but the IRA is meant to be a long-term investment,” said Chip Simon, a certified financial planner in Poughkeepsie, N.Y. “You probably want to have something that’s going to be steered toward some growth over time.”
For this, you’ll need a brokerage IRA, where you have a much wider array of investments and greater potential to grow your savings. You can build a diversified portfolio from a mix of stocks, bonds, mutual funds, ETFs and other investment vehicles, giving you the opportunity to earn a healthy return and fatten your nest egg over time.
Consider that 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.
“Oftentimes, what we find is that we can find a better money market than what our client is earning at the bank,” said Monica Dwyer, a certified financial planner in West Chester, Ohio.
Brokerage accounts have the advantage of being a good place to consolidate your savings over time. If you have a 401(k) from an old job, for instance, you can open a rollover IRA at the same brokerage where you have your Roth or traditional IRA (or both), a taxable account and/or a health savings account. Plus, brokerage accounts offer SIPC insurance on up to $500,000, often with secondary insurance on amounts above that.
Brokerage accounts are also easy to roll IRAs into and out of, versus a bank IRA. At a bank, the process can be more cumbersome, and the easiest way is often to take a direct withdrawal.
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