If you're looking for a risk-vehicle investment to hold within your IRA (individual retirement account), then you might be looking at certificates of deposit (CDs).
While the returns on CDs, especially in an IRA, aren't amazing, they have no risk of loss - and that's huge when you're on a fixed income.
You might here the term IRA Interest rates thrown around - but there's no such thing as "IRA Interest Rates". Remember, an IRA is just the vehicle you hold investments in. But given how many fixed income investors use CDs in an IRA, many bankers and investment advisors simply consolidate the wording to IRA interest rates.
Here's what you need to know about IRA interest rates, and where to find the best ones. Looking for a regular CD outside of an IRA? Check out our list of the best bank CD rates.
What Is an IRA?
IRA stands for individual retirement account. It is a container that holds investments used for retirement savings. The actual IRA doesn’t have an interest rate since it is only an account. What you put into the IRA can have an interest rate.
Looking to open an IRA? Here are the best places to open an IRA account.
There are several types of IRA accounts:
- Traditional IRA
- Roth IRA
- Nondeductible IRA
- SEP IRA
- SIMPLE IRA
- Self-directed IRA
The most common IRAs are traditional and Roth. A traditional IRA is often created when someone leaves a company where they had a 401(k). They then take the 401(k) and roll it into a traditional IRA. A Roth IRA is one that is built on after-tax contributions.
IRAs are often set up by individuals as a supplement to an employer-sponsored 401(k).
IRAs can hold nearly any kind of investment. If you’ve ever had an employer-sponsored 401(k) or 403(b), you know there are restrictions on the investments that you can participate in. Often, there is a small list of mutual funds and nothing else outside of that. Here’s a non-exhaustive list of what can go into an IRA:
- Options (some restrictions)
- Mutual funds
- Money market funds
- Exchange-traded funds (ETFs)
- Unit investment trusts (UITs)
- Real estate
Note that real estate is basically owned by the IRA. It can’t be in your name. Any income generated by the real estate goes back to the IRA and not you personally. This also means that you can’t use your IRA to buy a house.
It might be easier to list what can’t go into an IRA:
- Life insurance
- Specific derivatives with undefined risks (i.e., writing of naked puts or naked calls)
- Some coins
- Real estate for personal use
Each investment will have different returns and risks, which is what we will discuss next.
What Are IRA Interest Rates?
What can you expect to earn from your IRA? This will greatly depend on the investments in the IRA. When we refer to interest rates, we are talking about bonds and CDs. These are very conservative investments with predictable returns. For most people, investing in CDs will be much easier than investing in bonds.
CD rates vary depending on the bank or brokerage where you purchase them. Here are a few rates from different banks:
As you can see, it pays to shop around. Additionally, the longer your CD term, the higher your rate will be. There are no fees for opening an IRA CD, but minimum deposits will vary. If you take money out of the CD before its term ends, you may incur a penalty.
Stocks, mutual funds, and ETFs don’t have interest rates. Instead, they have price appreciation and dividends. They also have far more risk than CDs. These investments can be volatile since they will move with the overall market, both up and down. However, as IRAs are meant for retirement, the longer investment time frame lessens any impact from volatility.
Unlike a CD, mutual funds and ETFs have expense ratios. Ratios can range from below 0.10% of the value of your investment to well over 2.00%. Expense ratios have come down greatly in the past few years. There’s little reason to pay more than 1.00% in an expense ratio. You can find many investments for under 0.50%.
Stocks do not have expense ratios, but there are commissions when you buy and sell stocks. Some ETFs may also be charged commissions. Although lately, many brokerages are moving to commission-free trading.
Are There Any Fees?
Fees associated with CDs are related to early withdrawals. These can be fairly high. Some banks do allow early withdrawals without incurring penalties. Mutual funds and some ETFs do have expense ratios. Stocks and some ETFs are charged commissions.
How Do I Open an Account?
IRAs can be opened online at banks, brokerages, or at an investment company such as Vanguard. Not all banks and brokerages offer IRAs.
Is My Money Safe?
This depends on the investments in an IRA. If you open your IRA with an FDIC-insured institution and add CDs to it, the CDs will be insured.
Is It Worth It?
Yes — IRAs are very flexible and allow you to diversify your investments beyond what is offered in an employer-sponsored retirement plan. For those who are self-employed, IRAs are one of the only ways to participate in a retirement savings plan.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.