Why You Shouldn't Open An IRA Account With Your Bank
Many banks and federal credit unions in your city such as Wells Fargo, Citizens, and PNC offer IRA accounts. That is a good thing but opening IRA accounts with an online broker is generally a better option - and that includes Roth IRA accounts as well.
A IRA account is an excellent way to save for retirement. If you decide to open one, congratulations. However, the question is where should you open that IRA account?
Some banks and most online brokerage firms offer both IRA and Roth IRA accounts. However, the choice of where the money will be invested within the account at each institution varies widely. That can mean a big difference in the size of your savings at retirement. Let's compare the two:
Bank IRAs: Most bank IRAs offer a limited number of investment choices. They usually include a money market account or a CD (certificate of deposit) both of which are, essentially, a type of savings account. Of course they avoid the volatility of the stock market, but they also offer a much lower return on your money.
Broker IRAs: A IRA account opened with an investment brokerage firm such as Charles Schwab, TD Ameritrade, Fidelity, and E-Trade will offer a longer list of investment choices. Some of your investment options can include stocks, bonds, mutual funds, ETFS, gold, etc (in which can be volatile over time) which may offer much higher rates of return than CDs and money market funds.
Higher Risk, Higher Returns
So, why would someone open an IRA brokerage account as they may seem a bit riskier? Since saving for retirement is usually a long term goal, it's wise to take on some risk in the early working stages of your life.
In your working years, you are earning a salary and don't really need the money that you're contributing for example into an employer's retirement (401k) or IRA account. Over time, the account may experience ups and downs but usually the longer you have the money invested the better it does. The objective is consistent monthly investing into your IRA accounts and enjoy possible higher rate of returns over the years.
However, when retirement is about five years or so away, your IRA brokerage account investment options will need to be moved into more conservative options to avoid any risks due to any stock market volatility. Now, this is the time that a money market fund or CD is ideal.
Stock Market Historical Returns
If you're wondering how valuable stock market risk can be, consider this: The stock market (S&P 500) overall has paid an average return close to 10% annually over any 10-year period. The best bank savings accounts and CDs currently pay less than 1% - and many much less these days.
Choosing a IRA Brokerage Account
Figuring out where to open your new IRA account can get complicated. Most people are told to open one with their bank or credit union. If you are lucky enough and work with a professional financial advisor, you'll not only have access to a wide variety of investments choices but someone who can help guide you along the way. He/She can also open a IRA/Roth account for you.
What's Next
That's great if you're thinking about opening a new IRA or Roth IRA account. The sooner you do so the better. I prefer you open an IRA account with a brokerage firm because of the unlimited investment choices at your disposal and the opportunity to build a nice nest-egg over time. If, however, you still prefer the idea of a bank IRA, shop around for one that offers the highest interest rate (good luck).