Should You Open a Roth IRA at Your Bank?

The pros and cons of opening a Roth IRA at your bank

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Roth IRAs are individual retirement accounts that can offer you significant tax benefits. While your contributions aren’t tax-deductible upfront, qualified distributions will be tax-free once you’re at least 59½ years old. 

You can get a Roth IRA through financial institutions like brokerages and banks. So, you may be wondering whether you should open a Roth IRA at the same bank where you hold other accounts, like checking or savings. Here’s a closer look at what you should know before getting a Roth IRA from your bank.  

Key Takeaways

  • Banks that offer Roth IRAs may offer only CDs and money market accounts, which tend to pay more modest returns than assets like stocks and ETFs. Some banks do offer other assets like stocks, bonds, mutual funds, and ETFs through their Roth IRAs.
  • Bank Roth IRAs are insured by Federal Deposit Insurance Corporation (FDIC) for up to $250,000.
  • Brokerages may offer a broader range of Roth IRA investment options than some banks. 
  • In most cases, buying a Roth IRA from a brokerage makes more sense when you’re trying to fund a comfortable retirement. 

Choosing a Roth IRA Provider

The most common way to get a Roth IRA is to go to a brokerage. However, you’ll find that some banks and other financial institutions offer them, too. That said, the Roth IRAs at banks will typically be more savings-oriented than investment-oriented. You can typically invest your money in CD or money market accounts versus being invested in stocks, bonds, ETFs, and mutual funds.

Brokerage firms, on the other hand, specialize in buying and selling securities on behalf of their account holders. So, Roth IRAs offered by brokers will usually come with a full range of investment choices and higher return rates.

Pros and Cons of a Bank Roth IRA

Pros
  • Convenience

  • FDIC insurance

  • Low risk


Cons
  • Limited investment options

  • Lower average returns

  • Limited long-term earning potential


Pros Explained

  • Convenience: Having your Roth IRA account at the same institution as your checking and savings accounts can make it easier to manage your finances. You can log into one place to monitor all your accounts at once. Transfers between accounts can be quicker and easier. 
  • FDIC insurance: If you buy your Roth IRA through an FDIC-insured bank, it will be insured along with your other accounts, in aggregate, up to $250,000.
  • Low risk: Banks tend to offer lower-risk investments, like CDs and money market accounts, for Roth IRA investment choices. 

Cons Explained

  • Limited investment options: Most banks don’t offer a full range of investment options. You typically won’t be able to invest in stocks, bonds, ETFs, and mutual funds. 
  • Lower average returns: The savings-oriented investment options limit the interest you can earn and often result in much lower returns than from Roth IRAs that brokerages offer. 
  • Limited long-term earning potential: You could earn significantly less for retirement over time from a bank Roth IRA versus an IRA held with a brokerage. 

Should You Open a Roth IRA at Your Bank?

While a Roth IRA from a bank does provide more security thanks to low-risk investments and FDIC insurance, that security comes at a high cost. Consider that the average annualized return from the stock market (S&P 500) is about 9% to 10% per year. In contrast, a competitive CD offers a 1% to 2% annual percentage yield (APY).

The difference in returns can multiply over time with compounding. For example, if you invested $6,000 per year for 30 years in a bank Roth IRA that offered a 1% APY, you’d end up with about $216,796. On the other hand, if you invested the same $6,000 per year for 30 years in a brokerage Roth IRA that earned 9% APY, you’d end up with about $897,451. 

Roth IRA Account Provider Investment Types Investment Amount (per year) Investment Period APY Yield After 30 Years
Bank CD $6,000 30 years 1% $216,796
Broker Stocks (S&P 500) $6,000 30 years 9% $897,451

In most cases, it makes more sense to get a Roth IRA through a brokerage that can offer you the full range of investment options and higher ROI. The difference in the amount you end up with for retirement can be significant. However, be sure the brokerage you choose is long-standing and reputable. 

If you have a conservative strategy to protect your principal, such as when you're nearing retirement, using a Roth IRA at a bank may be beneficial.  

How To Open a Roth IRA at Your Bank

If you decide to open a Roth IRA at a bank, you’ll typically need to fill out an application. The paperwork will likely request details like your personal identifying information, tax reporting information, the IRA you want, your beneficiaries, your contribution methods, and more. 

Once approved, you can begin making contributions to the account and investing in your accounts of choice. 

How To Transfer a Roth IRA Between Banks

If you decide you want to transfer funds from one Roth IRA to another, you can. However, you need to be careful in order to avoid adverse tax consequences. 

Your first option is to perform a trustee-to-trustee transfer. In this case, a payment is made directly from your existing Roth IRA to your new Roth IRA and no taxes are withheld during the process.

The second option is to withdraw the funds from your existing Roth IRA account and then deposit the full amount into a new Roth IRA account within 60 days. This is called a 60-day rollover and you can make one every 12 months.

If you’re doing a 60-day rollover and don’t opt out of federal tax withholding, a 10% federal tax withholding will usually apply to your Roth IRA distribution. If that happens, you would need to pay the 10% difference when depositing the money into the new Roth IRA. This way, you will avoid an additional 10% tax on the withheld amount. 

Frequently Asked Questions (FAQs)

What bank is the best one for opening a Roth IRA?

Many banks offer Roth IRAs with investment options that tend to have lower-interest returns. Having a Roth IRA with your own bank can provide a convenient way to manage your accounts and make transfers. Shop around for bank IRAs with CDs and money market rates that are competitive. Some banks may offer investment options like stocks, bonds, mutual funds, and ETFs through Roth IRAs.  

When can you withdraw from your Roth IRA?

You can withdraw from your Roth IRA at any time. However, to avoid being taxed on your withdrawals, you must have had the Roth IRA for at least five years and be at least 59½ years old. You may also qualify if you meet the five-year requirement and are disabled, using the funds to buy your first home, or are a beneficiary receiving payment after the owner’s passing.

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