One of my most favorite questions that I often get as a financial planner is “What’s your best rates on Roth IRA’s?” Coming in at a close second is, “What’s the best stock to buy right now?” So how would you explain to somebody concerning rates on Roth IRA’s? Initially, I explain what an I-R-A stands for: Individual Retirement Arrangement (emphasis on arrangement), not Investment that Returns A lot or Interest Rate Account. I have to admit that I even thought that the “A” stood for account (but was informed by my readers that IRS actually refers to them as “arrangement”. (Thanks to my readers for keeping me on my toes!) Roth IRA’s don’t pay anything or have interest rates attached to them. They are just an account – a retirement account.
If this article was helpful, you may also want to check out these posts as well: Roth IRA- Time To Convert ,7 Things You Need to Know About the Roth IRA for 2009, 7 Things to Know About 2010 Roth IRA Conversion.
Roth IRA’s Are Not Investments
The Roth IRA serves as a retirement “account” not a retirement investment. Many people have the belief that IRA’s are like a CD and they pay an interest rate. This is most likely true if you invest in an IRA at your local bank. In this case, you are purchasing a CD within the IRA because CD’s are the only investment option that is available (some banks now do have in house brokerage firms that allow you to put money into other investments). So in this case, the best rate you can get on your Roth IRA Account is what the going CD rates are.
IRA’s Are The “Investment Vehicle”
I have always explained the IRA as your own personal investment vehicle. You then choose what passengers go inside your vehicle. The mental image of the clowns at the circus piling into the little car always comes to mind. You can have as many clowns in your IRA as you want to as few as you want. You could have all your money invested into Walmart stock or spread out across 100 different stocks (You would have to have a substantial amount of money in the IRA to do this). If you open an Traditional or Roth IRA at a brokerage firm, you may invest into CD’s just like at your local bank, but you also open the door to many other investment choices. Then what your IRA pays is determined on the actual return of that investment. If you had invested into the stock market in 2008, the your Roth IRA probably paid closer in the -30% range. (Ouch!)
So when somebody does ask me, “What is your best Roth IRA rate?”, I respond simply with “Depends”. Then wait for the confusion to set in 
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Great post. I didn’t realize that was a point of confusion for some people. But it would be nice to have a regular, guaranteed return on an IRA…
love the line at the beginning: Individual Retirement Account: not – Investment that Returns A lot – or – Interest Rate Account.
classic.
Bible Money Matters´s last blog ..Saving Up And Paying Cash For The Things You Buy Makes The Purchase More Enjoyable!
It’s scary how disconnected most people are from their investment accounts!
Just more proof that it pays to gain a secure understanding of where your money is, where it is heading, & what you want it to accomplish!
Matt Jabs´s last blog ..Sound Money Advice for You & Michael Jackson’s Kids – DFA Tip of the Week
Jeff: The IRS just recently changed the official name of IRA to mean “Individual Retirement Agreement”
I think you might want to take a look the tax code or even IRS Publication 590. It is a popular misconception that IRA stands for “Individual Retirement Account.” IRA actually stands for “Individual Retirement Arrangement.” There emphasis should be on the arrangement because that’s what it is, an arrangement between individuals and the government (if you follow these rule, the government will follow these rules.)
There are in fact IRA accounts and Roth IRA accounts that are deposit accounts at banks that do pay interest. So the question about rates for an IRA account does not necessarily indicate a misconception about what an IRA is, but instead it might indicate a misunderstanding over the difference between a brokerage account and a bank account.
Some of these institutions can really capitalize on advertising to the uninformed like myself about opening an IRA, as I was in the dark until I researched more online (more like a shadow now) about how these accounts (err-umm, excuse me…arrangements) work. I wanted to open a Roth IRA for my two teenagers who just started working so they’ll have a slight advantage for in the future. The sooner the better. We really need it now for our upcoming generations who will probably be paying the higher price of our faults today!