This is one of my most favorite questions in the financial industry. Right along with, “What’s the next hot stock tip?” So how do you answer that question? I first explain what an I-R-A stands for: Individual Retirement Account, not Investment that Returns A lot or Interest Rate Account.
IRA’s Are Not Investments
That means that the 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 little 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 just CD’s, but you also open the door to many other investment choices i.e. stocks, bonds, mutual funds, EFT’s, annuities. Then what your IRA pays is determined on the actual return of the investment.
So when somebody asks, “What is your IRA Paying?” My response is always quite simply , “Depends.”