A Roth IRA is a great way to save for retirement, and if you’ve decided to open one, kudos to you. That’s a smart money decision. Now, you’ll need to answer another question: Where should you open that Roth IRA?
Both banks and online brokers offer Roth IRA accounts. However, the choice of investments available at each varies widely — and that can mean a big difference in the size of your savings at retirement.
Bank Roth IRAs: Most bank Roth IRAs offer a limited number of investments, usually a certificate of deposit or a money market account, both of which are, essentially, a type of savings account. They avoid the volatility of the stock market, but they also offer a much lower return on your money.
Broker Roth IRAs: A Roth IRA opened at an investment broker will offer a long list of investment choices. That list will include stocks and stock mutual funds, which can be volatile but over time offer much higher rates of return than CDs and money market funds.
Higher risk, higher returns
Why would you pick a Roth IRA that’s riskier? Because with a long-term goal like retirement, it’s wise to take on some risk.
In the years when you’re working, you're earning a salary and don't need the money in your retirement account, and so it's OK if the account balance dips now and again. You just keep investing and, over time, your money enjoys a higher rate of return.
Then, when retirement is about five years or so away and you're going to need the money you've saved to live on, you sell some stock investments and buy into less-volatile investments. And you do that at a time when your account is sitting pretty. If there’s been a market dip, you wait a bit until your account balance recovers.
If you’re wondering how valuable stock-market risk can be, consider this: The stock market overall has paid annualized returns of about 10% over the past 10 years. The best bank savings accounts and CDs currently pay less than 3% — generally, it's much less.
And if the very thought of trying to pick stocks or other investments has you nervous, take heart. Investing isn’t rocket science. Here are three low-stress ways to invest for retirement. And here are simple retirement portfolios to get you to your goals.
Choosing a Roth IRA provider
Figuring out where to open your Roth can get complicated, partly because some banks also have investment advisories.
For example, you can open a Bank of America Roth IRA. Your money will go into either a low-yielding money market fund or a CD. Or you can open a Roth IRA at Merrill Edge, which is a broker and a subsidiary of Bank of America. There you'll get access to a wide variety of investments.
Similarly, there’s a Wells Fargo Bank Roth IRA, with access to savings accounts and certificates of deposit, currently paying rates ranging from about 0.01% to 1.6% (the rate varies by account type, balance and term). Meanwhile, Wells Fargo Advisors also offers a Roth IRA, and in that account, you’ll get access to many different investments.