How to Open at IRA at Your Bank

Should I get an IRA? Word IRA held in hand
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Want to open an Individual Retirement Account (IRA)? Consider your local bank.

Many banks offer IRAs for customers, which are essentially tax-advantaged retirement savings account with strict rules regarding contributions and withdrawals. For example, in order to make withdrawals without paying a hefty penalty, you must be 59 1/2.

Your bank may offer both a both traditional and a Roth IRA. So what's the difference between the two accounts? A traditional IRA allows you to make contributions tax free, but you are taxed on your withdrawals. A Roth IRA’s contributions are taxed, but you can make withdrawals tax-free once you reach retirement age.

The More Secure the Investment, the Lower the Return

Most banks offer IRAs as Certificates of Deposit(CDs). The CDs are insured by the FDIC for up to $250,000 total if the bank were to fail. However, the rate of return on the CDs is generally much lower than the rate of return if you were to open an IRA at a brokerage firm. Generally speaking, the more secure the investment, the lower the return.

The investment portion of your bank may offer IRAs that are not CDs, but once these funds are invested, they are not FDIC-insured. However, you will likely earn a much higher rate of return on your funds.

Worth noting: A CD locks in a set rate of return for a specific period of time, when that period of time ends, you will need to roll the current CD into a new one, without drawing out any funds. The market rates may go up or down depending on the current economic conditions.

Considerations When Choosing an IRA

When you are choosing the type of IRA you want to open you should consider if you prefer security or growth, the open an IRA with the institution that best meets your needs. This may also change according to your age.

When you are young, you may be comfortable with taking risks with your retirement savings. However, as you age (and get closer to retirement), your retirement investments should become more conservative.

If an IRA is your only current retirement savings account, you may be better off going with an investment firm, since they can offer you an overall better rate of return. You want your retirement savings to grow, so you can retire comfortably. Just remember to switch to a more conservative investment strategy as you grow older. If you want a self-directed IRA, you will need to look for one at an investment firm. 

Other Retirement Savings Options

In addition to your IRA, you should open a retirement account with your employer if they offer one, such as a 401(k). Additionally, if they offer an employer match, you should contribute at least that much to your retirement account.

If you are self-employed there are retirement accounts available to you. You can open a SEP, a KEOGH, or an IRA. Remember, when you are self-employed you are solely responsible to prepare for your retirement.

Although you are required to pay Social Security, you should not plan on receiving Social Security as part of your retirement financial plan. Social Security system may not be in place when you retire, and you may not qualify for as high of a benefit as you think.

Updated by Rachel Morgan Cautero.