Individual Retirement Accounts are popular options for people looking to save for retirement. They provide tax benefits that can help money grow at a faster pace, and they can also provide either a tax-deduction or tax-free income, depending on the type. I go through a comparison of the two types here.
Once a person decides to open an IRA, the next logical question is, “Where do I go to get one?” I’ve noticed that many people contact their bank about it. I had never even considered this until I started working in a bank. I always thought everyone would go with an investment company, but maybe that’s because I worked at one before I got into banking. As it turns out, banks are an option for opening an IRA.
It may surprise you, but I discourage most people from opening an IRA at a bank. I say that while I’m currently employed as an officer at a bank. I’ll cover several reasons why I feel this way.
1) Most bank employees don’t know how to do it. In a bank, you typically have tellers, platform bankers, and a manager or two. Many banks started combining tellers and platform bankers into something called hybrid bankers. The idea was that it would be nice if you could open an account and make a deposit with the same person. Regardless of whether an institution has a platform banker or a hybrid banker, my point remains the same—most of the employees don’t understand IRAs and certainly can’t open them. The manager may be able to do it, but it’s still not a common exercise for them compared to a loan or checking account. That means the manager could still be rusty and make mistakes throughout the account opening process. I’ve worked at 3 banks and my experience with this has been the same with each of them—most bank employees can’t do it. There is often only one or two bank employees in the geographic area who know anything about them, and all other employees will call that person for help when needed. There is very little training on it, and if an employee isn’t comfortable with it, they won’t open it. Even if they do open it, the odds of a mistake are very high. You don’t want someone who doesn’t know what they are doing to open a retirement account for you. This is your retirement money! It needs to be in good hands.
2) Your investment options and returns are extremely limited. Unless you can meet with a bank employee who is specifically licensed to offer a variety of investment products, your only options are to open an IRA in connection with a savings account, money market, or CD. That means your rate of return would be the same as whatever is being offered on those types of accounts. If it’s a savings account, then your rate is almost 0%. If it’s a money market, it will be subject to whatever rates are offered at that time, including promotional rates(in most cases). If you purchase a CD inside an IRA, it gets a little more tricky because you’ll need to make a decision on it each time the CD matures, unless you let it roll over into the standard rate. With a CD, you can only make changes at maturity plus a 10-day grace period, which is the same as a normal CD purchase. In essence, a savings, money market, or CD will all work the same way as they always do, but these would have the wrapping of an IRA. These would be your only investment options with a bank IRA. You couldn’t invest in mutual funds, stocks, bonds, etc. unless you met with a representative who was licensed to sell those to you. Unless you are already past age 65, I generally discourage most people from using these types of products inside an IRA due to the low return rates. A banker would be doing a huge disservice to a 30 year old who opens an IRA for long-term retirement plans and puts the funds into a CD.
3) It could be harder to make any changes to the account if needed. As I stated in my first point, most bank employees don’t know about IRAs. That includes not only opening an IRA for you, but also performing maintenance on them. Say you needed to make a partial withdrawal from your IRA in case of an emergency. Those same employees likely won’t know how to perform that function. Not only that, but they might screw up the tax portion of the transaction even if they successfully distribute funds to you. What I mean is that they might mess up how much tax is being withheld on the front end, and you can’t fix it until you file your taxes the following tax season. That creates an additional headache for you at best, and a potential IRS penalty at worst. You might also need to change a beneficiary on the account. Most bankers who are afraid to open IRAs will also be afraid to perform maintenance on IRAs, leaving you stranded. I've seen firsthand how many bankers struggle with something as simple as a withdrawal from an IRA.
4) Investment representatives deal with IRAs all the time compared to bankers inside the branch. If you’re going to open an IRA, my belief is that it should be done with someone who knows what they are doing. Not only that, but investment reps are more likely to work with you on your continued maintenance of the account. Depending on their licenses, they can help you select from a near endless range of investment possibilities. Since they deal with IRAs regularly, they are more likely to perform all tasks accurately and give you the best advice.
My bottom-line recommendation is to keep your IRAs at an investment institution, unless you simply love your banker to death and can’t live without them and fully trust them. Even then, if that person doesn’t share some of the risks vs. rewards of a bank IRA, then that does you a disservice. For example, if you’re 40 years old, you have no business investing in bank CDs for the next 25 years until you retire. You have plenty of time to see your money grow in investments that carry a higher reward possibility. Stick with someone who truly knows what they are doing. Your future self will be thankful you did.
