Can you have a savings account in a Roth IRA?
Yesterday, Brent wrote with a question regarding the types of investments one can have in a Roth IRA:
Is there such a thing as a Roth IRA “savings” account that gets rates comparable to a good “regular” savings accounts (5% APR or higher)? Is there a reason this is so difficult to find information on (at least for me)? It seems like any place that I want to take my Roth IRA to will require me to invest in mutual funds. It is currently in a savings account at Wells Fargo making somewhere around 1%, which I know sucks. I'm just wondering why there are so many savings accounts advertised everywhere giving (relatively) good interest rates but none that I can find for a Roth IRA.
Many investments one can make outside an IRA can also be made inside an IRA. The trick is finding an institution that can help you make the investments you want. A savings account isn't really appropriate for an IRA, however. Though it's possible to withdraw money from your account under special circumstances, IRAs are designed for retirement, not for easy fund access. (For more discussion on this, please see the comments on this post.)
Still, there are options available that mimic the risk and return of a savings account. Two spring immediately to mind.
First, if your IRA is held through a brokerage, you may able to obtain a relatively high rate through the company's money market fund. For example, my Roth IRA is currently with Sharebuilder. Most of that money is invested in stocks and index funds, but the cash that isn't sits in a money-market fund. If I wanted, I could hold all of my retirement investments in this fund. That fund currently earns me 4.35%, though it is not FDIC-insured. (A quick glance at ING Direct's site reveals a slightly higher rate.)
A second option is to put the money into certificates of deposit. You lose some flexibility when you tie your money up in CDs, but they offer decent returns over the short term. I phoned my credit union to ask about their current rates for CDs held inside a Roth IRA. As of today they offer:
- 12 months @ 4.40%
- 24 months @ 4.75%
- 36 months @ 4.95%
The offer longer CDs, too, but the rates top out at 4.95%. Your bank or brokerage may provide similar options. (Check Bankrate for more information.)
While it's possible to make investments in your IRA that approximate the risk and return of a savings account, they should be viewed as “deposit only”. You want to put the money in, but not withdraw it until you're ready to retire.
Thanks to Dylan of Swan Financial Planning for his help in preparing this response.