What's your best rate on Roth IRA's?
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.
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 IRA 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!)
Don’t Ask What the Best Roth IRA Rate Is
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 
{ 6 comments… read them below or add one }
I currently have two ira accounts with my bank for my wife and myself. from the time i opened these accounts 5 years ago i have lost money. i would like to retire in 10 years and am looking for the best place to invest my money for retirement. Everyone keeps telling me to put my money into a roth IRA, what is the difference between the IRA I have at fifththird bank and a roth IRA. I currently have 40,000 in my savings account and would like to know where i should be investing this money. i also have 80,00 in my 401K account.
Typically the Roth IRA account you have are the same. The BIG difference, I suspect, is that at your bank, your IRA is invested into CD’s, which is why you’re not losing money. Kind of like my example above. To get a higher “rate” on your Roth IRA, you need to invest into something that has more growth potential, like mutual funds or ETF’s.
I understand what you’re saying about a ROTH not being an investment vehicle. I totally get it. I think, though, what we mean when we ask our question is: “what kind of returns are the average investors making these days (in 2012) with their investments within their ROTH’s (that they opened through a brokerage firm) and – let’s say they have a “average” assortment of investments – fairly balanced and not too aggressive?? I realize that nobody can answer this exactly. I also realize that nobody can predict the future. But, still… what we mean by our question is: what do you, for instance, expect to earn from the investments within your ROTH over the next 10-15 years? What’s a reasonable wild guess??
@ Joe
That’s the point. You can’t throw out a “reasonable wild guess”. There’s too many factors at play here.
I’m sure most would like to earn an 8-12% rate of return on their Roth IRA, but once again – it all depends on what they are invested into.
So one can open various for oneself Roth IRAs?
I’m trying to start saving, I’m 25 years old. I want to have a lot of money saved by the time i’m 50-60 years old. What is my best option to do this with the least if not 0 amount of risk if I’m willing to put back 3K a year.