Are you thinking about opening an IRA for your retirement but not sure if your local bank is the right place to do it? I’ve been there. When I first started planning for retirement I automatically assumed my bank would be the best option simply because I already had accounts there. But is convenience really the most important factor when planning for your future?
In this article, I’ll walk you through everything you need to consider when deciding whether to open an IRA with your bank or look elsewhere. By the end, you’ll have a clearer picture of what option makes the most sense for your specific situation.
What Exactly Is an IRA?
Before diving into where to open an IRA, let’s make sure we’re on the same page about what an IRA actually is.
An IRA (Individual Retirement Arrangement) is a tax-advantaged personal savings plan designed to help you save for retirement, IRAs allow you to make tax-deferred investments to provide financial security when you retire
There are two main types of IRAs you should know about:
- Traditional IRA: Contributions may be tax-deductible, reducing your taxable income now. However, you’ll pay taxes when you withdraw the money in retirement.
- Roth IRA: Contributions are made with after-tax dollars (not tax-deductible), but qualified withdrawals in retirement are completely tax-free.
The IRS sets contribution limits each year. For 2023, you could contribute up to $6,500 per year, and this increases to $7,000 in 2024. If you’re 50 or older, you can make an additional $1,000 “catch-up” contribution.
Pros of Opening an IRA with Your Bank
Let’s start with the positives of choosing your bank for your IRA:
1. Convenience
This is probably the biggest advantage. You can easily transfer money from your checking or savings account to your IRA. Most banks offer online banking, making it simple to monitor all your accounts in one place. When I first started saving for retirement, having everything in one place made it less intimidating.
2. Safety and Security
Bank IRAs are typically FDIC insured up to $250,000 per person, per bank. If your bank were to fail, your retirement savings would still be protected up to that limit. This gives you a peace of mind that other investment options might not provide.
3. Simplicity
If you’re new to investing, bank IRAs are relatively straightforward. As investments, they usually offer savings accounts and CDs (Certificates of Deposit), which are simpler to understand than money market funds, stocks, and bonds.
4. Personal Relationship
Meeting the person who manages your retirement account in person can give you peace of mind. If you’re already friendly with your bank, you might like being able to just walk in and talk to someone about your retirement account.
Cons of Opening an IRA with Your Bank
Now for the not-so-good aspects:
1. Limited Investment Options
This is probably the biggest drawback. Most banks primarily offer CDs and savings accounts for their IRAs. While these are secure, they typically provide much lower returns compared to stocks, bonds, or mutual funds offered by brokerage firms.
2. Lower Potential Returns
Your retirement savings may not grow as much as they could because you only have a few investment options. The more secure the investment, the lower the return. On average, a CD will earn you 2% to 3% per year, while the stock market has historically returned between 1% and 10% per year over the long term.
3. Higher Fees
Most of the time, banks charge more than online brokers or investment firms to manage IRAs. These fees can eat into your returns over time. Over many years, even small changes in fees can cause retirement savings to drop by thousands of dollars.
4. Less Flexibility
Banks typically don’t offer the same level of flexibility as brokerages when it comes to investment choices or account management features.
Alternatives to Bank IRAs
If you’re not convinced a bank IRA is right for you, here are some alternatives:
Online Brokers
Companies like Fidelity, Vanguard, or Charles Schwab offer IRAs with much wider investment options, typically lower fees, and powerful investment tools. They allow you to invest in stocks, bonds, mutual funds, ETFs, and more.
Robo-Advisors
Services like Betterment or Wealthfront provide automated investment management based on your goals and risk tolerance. They offer diversified portfolios with lower fees than traditional financial advisors.
Investment Firms
Traditional investment companies can provide personalized service with access to professional financial advisors, though often at a higher cost than online options.
Who Should Consider a Bank IRA?
Despite the limitations, bank IRAs might be a good fit for certain people:
- Conservative investors who prioritize security over growth potential
- Individuals nearing retirement who want to protect their savings from market volatility
- Beginners who find the investment world overwhelming and want to start simple
- People with a small amount to invest who might not meet the minimum requirements at some brokerages
Who Should Look Beyond Their Bank?
You might want to consider other options if you:
- Have a long time horizon (10+ years until retirement)
- Want to maximize growth potential
- Are comfortable with some market volatility
- Want a wider range of investment options
- Are concerned about fees eating into your returns
How to Decide What’s Right for You
To make the best decision for your situation, consider these factors:
1. Your Investment Experience and Knowledge
If you’re a complete beginner, a bank IRA might be a good starting point. As you learn more, you can always transfer your IRA to a brokerage later.
2. Your Time Horizon
The longer you have until retirement, the more important growth potential becomes. If retirement is decades away, the limited returns of bank IRAs could seriously impact your retirement savings.
3. Your Risk Tolerance
Be honest with yourself about how you’d react to market downturns. If the thought of your account losing value, even temporarily, would keep you up at night, a bank’s more conservative options might be better suited to your personality.
4. Your Investment Goals
Calculate how much you need to save for retirement and work backward to determine what rate of return you need to reach that goal. This can help you decide if a bank IRA’s returns will be sufficient.
A Hybrid Approach That Worked for Me
When I was starting out, I actually took a hybrid approach. I opened a small IRA at my local bank just to get comfortable with the concept. The familiarity made it less intimidating. After about a year, once I understood how IRAs worked and had done more research, I opened another IRA with an online brokerage that offered more investment options and lower fees.
I gradually transferred funds from my bank IRA to my brokerage IRA as I became more confident. This stepped approach worked well for me – I got started without feeling overwhelmed, but didn’t limit my growth potential in the long run.
Steps to Open an IRA (Wherever You Choose)
If you’ve decided where to open your IRA, here’s how to get started:
- Choose your IRA type: Traditional or Roth
- Select a provider: Bank, brokerage, robo-advisor, etc.
- Complete the application: You’ll need to provide identification, social security number, employment information, etc.
- Fund your account: Transfer money from an existing account or set up recurring contributions
- Select investments: Choose CDs at a bank, or select from available investment options at a brokerage
- Set up regular contributions: Automating your contributions makes saving easier
FAQ About Bank IRAs
Do banks charge fees for IRA accounts?
Most banks don’t charge setup fees for IRAs, but they might have annual maintenance fees, transaction fees, or early withdrawal penalties for CDs. Always ask about all potential fees before opening an account.
Can I transfer my bank IRA to a brokerage later?
Yes! If you start with a bank IRA and later decide you want more investment options, you can do a direct transfer to a brokerage firm without tax penalties.
What’s the minimum amount needed to open an IRA at a bank?
This varies by bank, but many will let you open an IRA with as little as $25-$100, especially if you set up automatic contributions.
Are bank IRAs really safer than brokerage IRAs?
Bank IRAs invested in CDs or savings accounts are FDIC insured up to $250,000. Brokerage IRAs are typically covered by SIPC insurance, which works differently than FDIC but still provides protection against the brokerage firm failing (though not against investment losses).
Final Thoughts
Opening an IRA with your bank can be a good starting point, especially if you value simplicity and security over maximum growth. However, the limited investment options and potentially higher fees make it less than ideal for many people, particularly those with a long time horizon.
I recommend weighing all factors carefully based on your personal situation. Remember that where you open your IRA today doesn’t have to be a permanent decision – you can always transfer your IRA later as your needs change.
The most important thing is to start saving for retirement, even if your setup isn’t perfect right away. The power of compound interest means that beginning early, even with a less-than-optimal account, is better than waiting until you’ve found the “perfect” option.
Have you opened an IRA with your bank? What has your experience been like? I’d love to hear your thoughts and questions in the comments below!
Set up your IRA
- Should I get a traditional IRA or a Roth IRA?
- Traditional vs. Roth IRA comparison chart
- One can open an IRA at a bank or other financial institution, with a life insurance company, with a mutual fund company, or with a stockbroker.
- Contributions to a traditional IRA may be tax-deductible, making it a tax-advantaged way to save money.
- If you put money into a Roth IRA, you don’t get a tax break for it, but you may not have to pay taxes on certain withdrawals.
- An employer sets up a Payroll Deduction IRA plan. Employees set up a Traditional or Roth IRA with a bank and have money taken out of their paychecks to put into it.
- A simplified employee pension plan (SEP) is one that a company sets up. Employers make direct contributions to an IRA that is set up for each worker.
- An employer sets up a SIMPLE IRA plan as a way to help workers save money. In a SIMPLE IRA plan, workers can choose to put money away from their paychecks, and their employers can either match those contributions or not make any at all.
- An employer set up a Salary Reduction Simplified Employee Pension Plan (SARSEP) before 1997. It is a type of SEP that includes a salary reduction plan.
Assess your financial needs
- Where am I, financially? Taking Stock (U. S. The Securities and Exchange Commission (SEC) can help you look at your money.
- When I retire, how much will my Social Security benefit be? Figure out how much you can expect to get from Social Security.
- The Department of Labor and Investor websites also have information on how to plan for retirement.