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Do you need to open an IRA at your bank?

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Most people have some knowledge about the concept behind an individual retirement account (IRA).

What most people do not know is that there are significant differences between IRAs offered by banks and credit unions and those offered by investment firms and other types of financial institutions.

Since IRAs offered by banks tend to be less flexible than those available from other providers, it makes sense to have a discussion specifically about the Bank IRA.

With this in mind, the following information will focus on the pros and cons of this retirement investment option at your local or online bank.

What is a Bank IRA?

financial graphics that save money in an IRA at a bank

What is a Bank IRA?

There is nothing difficult about this question. This type of IRA is a retirement savings account explicitly offered by banks and credit unions. Yet, they tend to differ from IRAs available elsewhere in that they offer much less flexibility in terms of investment options and offer lower returns.

Unlike less flexibility and earnings, a bank IRA works similarly to other types of IRAs when it comes to contribution limits, tax benefits and income limits.

They are available under the same IRS guidelines and tax rules as the traditional IRAs offered by other financial firms.

What is an IRA, and how does it work?

If you happen to be, you are not familiar with the traditional IRA concept, you should find the following information useful.

Most employers with 50+ employees will offer employees access to a tax benefit 401K retirement investment account or an equivalent 403 (b). For many reasons, it is a job benefit that employees tend to covet, one is the tax benefits.

For employees and business owners who do not have access to a workplace retirement plan or want to invest more than the annual contribution limit of 401 (k), the Internal Revenue Service (IRS) has designed the IRA.

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A traditional IRA is an investment option that allows participants to invest a portion of their annual income on a pre-tax basis. The term pre-tax base means that the amount the individual invests will come right from their taxable income before their final tax liability is calculated.

Under IRS guidelines, IRA investors can invest limited funds in a wide variety of options, including:

Under additional IRS guidelines, IRA investors are allowed to withdraw their money at any time. However, you will be hit with a 10% penalty on all amounts you choose to withdraw before you reach 59 1/2 years of age, with a few exceptions mentioned below. After you reach that key age, there will be no withdrawal penalties.

Once you reach the age of 72, you will need to take annual required minimum benefits from your Traditional IRA.

Whether you gain early access to the funds in your Traditional IRA or as deductions in retirement, you will have to pay income tax on the withdrawal amount at your applicable tax rate due to obtaining a tax deduction in advance upon contribution.

There is an emergency loan. According to the IRS, penalty-free withdrawals can be allowed as loans under the following circumstances:

  • To cover medical expenses
  • To cover higher education costs for offspring or the taxpayer
  • A limited amount to be used for the purchase of a primary residence
  • To pay a federal tax liability
  • For home improvements
  • To cover wedding costs
  • For the purchase of a primary car

Once an IRA loan is taken out, the investor will simply make repayments in their IRA, plus any applicable interest.

The Pros and Cons of a Bank IRA

Now that you have some understanding of how a traditional IRA works, it will be easier to look at the pros and cons of a banking IRA.

Remember, we mentioned that banking IRAs are a little more limited in terms of investment options and returns. In essence, banks tend to offer only IRAs linked to CD investments.

Under certain circumstances, a bank may offer other investment options to its IRA investors, primarily focusing on equities, mutual funds and bonds. But that list of options is significantly less than those offered by brokerage firms and other financial institutions.

Go ahead, here are the pros and cons of a bank IRA.

The benefits

The primary benefits of securing an IRA through a bank are:

  • Fixed and guaranteed rate of return on the investment amount
  • The FDIC secures the CD investment for up to $ 250K. It protects against a bank’s default
  • CDs require little investment education
  • The investment decision is very easy, especially when it is time to renew the CD
  • The fixed rate benefit provides for more precise financial planning that goes into retirement
  • Banks are easier to deal with and tend to require less documentation than investment firms
  • It’s easy to tie up bank accounts and IRAs within the same bank

The disadvantages

Of course, any investment option will have some negatives or disadvantages. In the case of a bank IRA, the disadvantages are:

  • Little to no ability to invest diversely
  • Certificate of Deposit rates are typically low, many times significantly lower than most other types of investments. There is an opportunity cost associated with choosing a low-yield conservative investment.
  • No option for other brokerage services
  • Lower returns will lead to less financial resources at retirement

Bank IRA – Yes or No?

You now have a general idea about the differences between an IRA that you can open at a bank and IRAs that are available at other financial institutions.

You also have a general idea about the pros and cons of a bank IRA. The question is, how do you decide which option is better for you and your financial goals?

As a general rule, you should let your current age and expected retirement age play a significant role in how you invest your retirement funds, whether it is within an employer-guaranteed retirement plan, an online brokerage account or at your local bank.

If you are under the age of 40, you can afford to take more risks for higher returns. This is true because you will have plenty of time to recover from adverse investment events. A bank IRA is probably not your best investment option as part of this age group.

If you are in your 40s, you can probably still afford to take certain risks, but if you are close to 50, you may want to consider opening an IRA at a bank that offers a wider range of investment options. This is a good time to start thinking about diversity.

In your 50s, your current personal financial situation should be your guide. You have little time to plan and reach your retirement goal and may want to become conservative with your retirement investment.

If you are already in your 60s, reading to retire, and have limited resources outside of Social Security, you will probably want to start using your IRA. While doing so, or if you can drive it, a bank IRA with a CD investment will protect your retirement resources while still providing a small return on investment.

Final Thoughts

After reviewing the pros and cons of using a banking IRA and how it can fit into your financial situation, consider consulting a financial adviser if you are still unsure about which option to take.

(You may also want to consult a tax advisor when deciding between the traditional IRA and Roth IRA.)

If you are in doubt about the future, there is nothing wrong with taking the path with the least risk while building your nest egg; just remember you can sacrifice some earnings.

Next: What To Know As A Startup Investor

Vicki Cook and Amy Blacklock

Amy and Vicki are the co-authors of Estate Planning 101, of Adams Media, from avoiding experimentation and assessing assets to drafting prescriptions and understanding taxation, your essential basis for estate planning.

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