Believe it or not, a lot of people still think that if you want to open an IRA, you have to go to a local bank and open up a certificate of deposit or other bank account. As a result, when they see IRA interest rates that are lower than ever, they figure there's really no point in bothering to invest at all.
In reality, though, IRAs are far more flexible than that. You may not be able to use an IRA to its full potential at certain financial institutions, but if you're willing to look beyond your comfort zone to different sorts of IRA providers, you can get the retirement account investments you need to reach all of your financial goals.
What an IRA can do
The confusion about IRAs comes from the fact that so many financial institutions offer them in conjunction with their other nonretirement products. For instance, if you look at Bank of America (NYSE:BAC) or Citibank (NYSE:C) in search of IRAs, their websites will point you first toward savings, money market, and CD accounts. Similarly, if you go to Hartford Financial (NYSE:HIG), you'll find discussion about using mutual funds and annuities -- the same products the insurance and investment giant offers to clients outside retirement accounts.
If you're more familiar with the limited investment options that retirement plans offered at work through 401(k) or other employer-sponsored plans give you, then the wide range of available IRA investments may surprise you. In addition to brokerage accounts giving you access to stocks, bonds, funds, ETFs, insurance products, and other financial assets, certain financial institutions will let you get extremely creative with your IRA investments, opening the door to assets like real estate, gold coins, or even private business interests. As long as you don't run afoul of certain IRS limitations that prevent you from using IRA funds to invest in property or a business in which you have a direct interest, you can invest in nearly anything using IRAs.
Get more from your IRA
Because IRAs are available from so many places, if your usual financial institution isn't offering you a deal that looks attractive to you, you should go elsewhere and find a better deal. Often, you'll find an alternative that better meets your needs.
For instance, right now, many retirees and other conservative investors are having trouble generating the income they need from their portfolios to meet their living expenses. With the Federal Reserve having reduced interest rates as low as they can go, banks have reduced their interest rates from the 4% to 5% we saw just five or six years ago down to the 0% to 1% range. That's a big income haircut that is hurting savers. Unfortunately, it's hard to find other fixed-income investments that pay much more in interest than that; low-risk Treasury and corporate debt pays little if any more interest than bank CDs, and even higher-yielding junk corporate debt doesn't give you much extra income to compensate for the default risk you take on.
In response, many investors who used to rely on CDs and other fixed-income investments have turned to dividend stocks. Unquestionably, stocks involve quite a bit more risk than CDs, as there's absolutely no guarantee that a stock will maintain its value and could in fact produce some major losses. But with blue chip stocks AT&T (NYSE:T) and Intel (NASDAQ:INTC) having solid, attractive yields in the 4% to 5% range, you don't have to take huge risks in order to get the income you need. More speculative stocks give you the potential to earn even higher double-digit percentage dividend yields. For many, the prospect of boosting your income in an IRA gives you an ample reward in exchange for taking on that risk.
Take that to the bank
IRA interest rates are unquestionably low on bank products and other low-risk investments. But if you need more income, IRAs give you the flexibility to get it on your terms. If the institution you're working with won't give you access to investments that will get the job done, then you'll just have to take matters into your own hands.