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).
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
Then wait for the confusion to set in