Should You Open a Roth IRA at a Bank?

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.» Ready to get started? Jump to our primer on how to open a Roth IRA

Choosing a Roth IRA provider

Bank Roth IRAs: Most bank or credit union 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.

Figuring out which to choose 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.

Thinking about the amount of risk you want to take on will help you decide.

» Learn more about how Roth IRAs work

Roth IRAs and risk

The upside to a savings account Roth IRA is they provide guaranteed returns, and don't come with much risk.

The upside to a broker Roth IRA is that while there are higher risks, there is also that possibility for higher returns. And with a long-term goal like retirement, it’s wise to take on some risk.

With that added risk, though, can come rewards. The average stock market return from the past several decades is about 10%, not accounting for inflation. The best savings accounts and CDs currently pay about 4% — that’s the highest it’s been in years, though it's still less.

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 could consider selling some stock investments and buying into less-volatile investments. And you do that at a time when your account has a healthy balance. If there’s been a market dip, you wait a bit until your account balance recovers.

If the very thought of trying to pick stocks or other investments has you nervous, take heart. Investing isn’t rocket science. And if you don't want to pick your own investments, you can use a robo-advisor, where an algorithm picks for you based on your investing goals, time until retirement and your risk tolerance.

What's next?

If you’re ready to open a Roth IRA at an investment broker, we've reviewed and rated the best Roth IRA accounts. If, however, you still prefer the idea of a bank IRA, shop around for one that offers the highest interest rate. Here are our picks for the best IRA CD rates.