How To Find The Best IRA Rates

The rate is determined by what you buy inside your IRA.

Two men reading the newspaper looking for IRA rates.
You won't find IRA rates in the newspaper. Here's why. PhotoAlto/Getty Images

While CDs (Certificates of Deposits) have a published rate of return, IRAs do not. That's because a CD is an investment and an IRA is not. An IRA is a type of account. Inside the IRA account, you can own various types of investments such as CDs, mutual funds, stocks, etc. The investments will determine the rate of return you earn.

Many people misunderstand how investing in an IRA works. The conversation below happens frequently:

"Where can I find the best IRA rate for my rollover?" says a customer.

"There is no such thing as an IRA rate," I reply.

"What? What are you talking about?"

There's No Such Thing as an IRA Rate

It's true. There is no such thing as an IRA rate. It is a misunderstood term. An IRA, or Individual Retirement Account, is just that - an account. It's not an investment. 

The term "IRA" is a label that describes the tax treatment that applies to investments inside of the IRA. With IRAs, you don't pay taxes each year on the interest, dividends or capital gains that your IRA investments earn. Instead, the investment income accumulates inside the IRA, and you pay taxes at the time you take a withdrawal. (Unless it is a Roth IRA in which case withdrawals may be tax-free.)

Think of an IRA as a bucket. Suppose you were asked to estimate the weight of a bucket, but you couldn't see what was in it. To come up with an accurate estimate, you would need to know what was in the bucket; air, water, sand, or bricks, for example.

 Just like determining how much the bucket weighs, to determine an IRA rate, you have to know what types of investments will be inside that IRA.

How Do You Determine The Rate of Return?

To estimate the rate of return your IRA may earn you have to look at the performance of the underlying investments you will choose.

For example:

  • An IRA can own CDs (certificates of deposit) in which case you want to look for the best CD rates.
  • An IRA can invest in a fixed annuity, in which case you want to look for the best fixed annuity rates.
  • An IRA can own treasury securities, or government bonds, in which case the IRA rate will be a combination of the interest rates paid by the underlying bonds that it owns.
  • An IRA can own mutual funds, in which case you need to decide whether to own stock, bond, or balanced mutual funds, and look at the performance history to determine their past rate of return. And of course, last year's return does not mean that it is what it will earn this year.
  • An IRA can own individual stocks, and if structured properly, an IRA can even own real estate, as well as just many other types of investments.

To find the best IRA rate, first, you have to decide how much investment risk you are comfortable taking. Most investment choices that have the potential to pay a higher long-term rate of return offer less stability in the short-term. If you are young, choosing higher risk investments, like stock mutual funds, is likely to give you a higher return than choosng safer choices like CDs.

Once you've chosen the investments you want your IRA to hold, you can then look at the performance history of those investments, which would only be called a "rate" if it was an interest paying investment like a CD, fixed annuity, or bond.

If it is a mutual fund, such as an S&P 500 Index fund, you can look at the historical rates of return for the stock market to see what rate of return you would have earned each year in the past.

What to Watch Out For

If an investment firm seems to be offering a much higher rate than you can find anywhere else, you need to be cautious. No one gives money away. High returns with low risk do not exist. 

Many advertisements lure you in with a promise of a high rate, but when you read the fine print and see how the investment is structured, it may not be not as attractive as the advertising makes it appear. Often these advertisements are sponsored by firms that receive a commission to sell you their investment products. If something seems to good to be true, have someone independent help you evaluate the investment before you buy.

Too many people lose money on bad investments, all in the hopes of earning a slightly higher rate of return.