Do IRAs have interest rates? If so, how to shop for best rate?

[Guest Zelly Miller]

I never see interest rates mentioned when IRAs are discussed.

Are IRAs and Roth IRAs attached to interest rates, and if so, what is the best way to go about shopping around for the best rate?

Can this rate change through the life of the IRA?

Thanks for any input.

Zelly M.

[John G]

Zelly, you have a wide range of investment choices with IRAs. Yes, you can buy CDs, bonds, or mutual funds based upon bonds. The time periods and interest rates will vary just like any other investment choice. For example, you can put IRA assets in a money market account where your interest rate floats with general interest rates. You can put your money in a bank IRA and choose 2, 5 or 10 year maturities.

The reason you do not see interest rates cited in most IRA ads is because interest yielding investments are very conservative. Over the long haul, equities (another name for stocks) tend to provide better returns. For example, the annual average return in stocks is between 10 and 15% depending upon your snapshot and definitions. For bonds and cds, the long term average is in the 6-8% range. The bonds/cds are much more predictable and may even be insured (like bank CDs) against loss of principle. But they don't build a nest egg very quickly.

Stock returns are more variable. In a given year, a mixed portfolio may go down 45% or up 70%. Thats a lot of variability. But in the past century there has not been a single 20 year period when stocks were down. And, good years outnumber bad years about six to one. So, over the long haul you typically get a very good return. You should never get worried over what the stock market did in one day, one week or even one year. Think long term. At a 10% annual growth rate your assets double every 7 years.

If you are five years or less from retirement, AND expect to immediately draw down on your IRA, then safety is a concern. But, if retirement is a couple of decades away then you need to have a significant part of your retirement assets in stocks.

One last point. Stock price flucuation is not the only risk you must consider. If you make overly safe investments, your assets may not meet your retirement needs. Inflation is constantly eroding your purchasing power... even in recent years, albeit at a slower rate.

Post again if you have additional questions.