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Even the Best IRA Interest Rates Can't Beat This Strategy

Many people fundamentally misunderstand IRAs, thinking they're just another type of bank account like a CD that pays a fixed interest rate over a period of time. Yet even though you can open a retirement account that invests in interest-bearing accounts, the best IRA interest rates right now don't stand a chance of matching the long-term results of more aggressive investment strategies that go beyond FDIC-insured bank accounts.


Source: Tax Credits, Flickr.

Unleashing the full power of your IRA
If you look for the best IRA interest rates, you'll find a host of different banks offering various types of products, including savings accounts and certificates of deposit. But because the Federal Reserve has held short-term interest rates low for years, you'll find that most institutions pay extremely low rates on IRAs. For instance, a check for the top rates in the country right now showed the best you can do on a one-year IRA CD is 1.16%. That's not even enough to keep pace with the loss of purchasing power from inflation, let alone provide any real return. Even if you're willing to lock up your money until 2019, you'll only add another percentage point to your IRA interest rate, with Barclays paying 2.15% for a five-year IRA CD -- just barely more than the current inflation rate and below the historical average for inflation over the long run.

But if you're looking for the best IRA interest rates you can find, you might not even realize that you don't have to go to a bank to open an IRA. The best thing about IRAs is that they're extremely flexible ways to invest for retirement, allowing you to buy anything from individual stocks and bonds to mutual funds and exchange-traded funds that offer diversified portfolios of multiple investments in a single, easy-to-buy package. And if it's income you want, there are ways to get it that can actually pay you more than you'll get from the best IRA interest rates on CDs and other bank accounts right now.

Looking at conservative dividend stocks
Millions of investors have discovered the power of dividend stocks that both pay current income and provide growth potential. Unlike an IRA CD, holding individual dividend stocks in your IRA gives you the chance to see your invested principal grow in value, rather than simply relying on interest payments for minimal returns.

Obviously, investing in stocks also involves greater risk. Unlike an IRA CD, you can lose money that you invest in stocks within an IRA. As a result, most people won't want to invest all of their retirement savings in stocks.

But even if you limit yourself to some of the largest corporations in the world, you can find dividend yields that pay double what you'll get from the best IRA interest rates out there. Consider the following:

  • Verizon (NYSE: VZ  ) is the largest wireless carrier in the U.S., and it pays a dividend yield of 4.5%. It has taken on the risk of assuming full control of its Verizon Wireless business, but that also gives the stock huge growth potential as wireless devices become even more prevalent throughout the country.
  • Philip Morris International (NYSE: PM  ) is one of the companies behind Marlboro cigarettes. While it doesn't sell to U.S. customers, but instead around the world, Philip Morris has taken advantage of new markets for tobacco to find new avenues for growth that domestic tobacco companies have largely left untapped. Philip Morris has a solid history of dividend growth and currently pays 4.7% in dividend yields.
  • Total (NYSE: TOT  ) isn't a household name among American investors, but the French oil giant has extensive holdings around the world, including promising areas from the Bakken shale play of North Dakota and the extensive natural gas fields of Papua New Guinea. Its 5.5% dividend yield also gives shareholders exposure to the future prospects of solar power, with the company holding about two-thirds of the outstanding shares of U.S. solar giant SunPower (NASDAQ: SPWR  ) . For those who fear an eventual shift away from fossil fuels, Total's holdings in SunPower show the company's forward-thinking nature.

All three of these companies have market capitalizations of more than $100 billion. That doesn't mean that they're immune to declines, but they're less likely to suffer a complete collapse than smaller, more speculative stocks that don't have the extended track histories that these companies possess.

It's tempting to try to lock in a sure thing by seeking the best IRA interest rates you can find. But given how low those rates are, your better bet is to put at least some of your money into income-paying stocks. Over the long haul, you'll find that the combination of income and growth will likely keep you ahead of the game.

Go beyond IRA CDs
If you want to see more stocks that can give you better returns than you'll get from even the best IRA interest rates, look no further. Our top analysts have put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2014, at 1:00 PM, roccolam wrote:

    Barclays does not offer IRA's by the way. You should probably do more research.

  • Report this Comment On September 23, 2014, at 1:47 AM, dogmed wrote:

    I just inherited my Husband's IRA & know nothing about it. Am in my 70's, so not interested in anything over 24 months. Banker said I should rollover into another IRA , but can keep some of it now to make up for the loss of income from his ss check.

    I liked what you wrote about Verizon, but since it is not an IRA, wouldn't I loose too much money in investing in it? The amount I would be able to invest is only about $20k. Since I can't afford to loose any money, (only have my ssec check), what would you tell your mother to do? Thank you for your advise.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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