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

Many believe the secret to retiring rich is getting great IRA interest rates, but you'll find your best solution from another angle. Find out more here.

Feb 10, 2014 at 8:40AM

This article was updated on May 14, 2015.

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: TaxCredits.net via 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 1.35%. 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 2020, you'll add less than a percentage point to your IRA interest rate, with one of the top providers paying 2.2% 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 4.4%. 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 4.8% 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. Oil's recent volatility has made many investors nervous about major oil and gas stocks, but Total's 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.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Total. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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