High Yield IRAs

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Nest Eggs!All throughout tax season, from about mid-February to early-April, I received letters from my banks telling me it that I was running out of time to contribute to an IRA. This happens every year because brokers and banks want your business. They want you to open your IRA with them. The letters pitch various products and the most intriguing one I saw this year was a letter from Everbank advertising a high yield IRA.

Everyone likes a high yield IRA, right? Reminds me a little of this insight into retirement wealth:

  1. Open high yield IRA.
  2. ???
  3. Profit!

The problem is that the term “high yield IRA” is a misnomer. The IRA isn’t high yield, the “investment” inside is what makes it high yield and in the case of any bank that markets a high yield IRA, that investment is a certificate of deposit. At Bank of America it’s a 2.10% APY 30-month high yield CD with a $2,000 minimum balance. At Everbank, it’s a 1.40% APY 1-year CD with a $1,500 minimum balance. These rates, adjusted for the tax benefits of IRAs, are comparable to the best CD rates available.

Banks have been marketing these high yield IRAs because they are safe. CDs, whether inside or outside an IRA, are still FDIC insured and your principal is protected. Unlike stock market investments, the dollar value of your CD will never decrease. This is very appealing after such a volatile year in the stock market but it may not be the most prudent choice.

Do they make sensible retirement investments? It depends on your needs.

  • If you are near retirement and are looking to draw income from your IRA, a CD in your IRA may be the right choice. At this point in your financial plan, you’re looking to draw down your retirement assets and you will need investments that support that goal. It may make sense for you to put a portion of your portfolio in ultra-safe CDs.
  • If you’re many years from retirement, a high yield CD in an IRA may not be the most prudent financial choice. We’re in this group and we’re decades away from retirement. Our retirement assets are invested in the stock market. The volatility is scary but putting it in a CD earning 2.10% or 1.40% will simply not get us to our retirement goals, especially when you consider inflation. We benefit from Father Time smoothing out the volatile markets so the stock market is a better option for us.

You will need to analyze your situation to find the best choice but I felt that, after receiving all the mailers about “high yield IRAs,” I needed to address the misnomer.

Have you received similar mailers? What did you think of the offers?

(Photo: OakleyOriginals)

{ 10 comments, please add your thoughts now! }

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10 Responses to “High Yield IRAs”

  1. billsnider says:

    I like your line which says that “we’re decades away from retirement”. Not true in my case.

    Back to your point. Yes, I continue to get a lot of mailings that try to get me to open an IRA. They are from banks and financial institutions such as Fidelity. Some want me to transfer assets. I throw them all away.

    You are right – these are not high yield CD’s compared to the past rates. In the 70’s yields were in the upper teens (as well as mortgages, car loans, etc). If you think those rates were great, you don’t know history. This country was in a mess financially, morally and politically. Inflation AND unemployment were in double digits.

    Key then and still is to try and maximize all your investments given a comfortable risk exposure. As we discussed a while back, I live by the rule of 100 and have done quite well by it.

    Bill Snider

  2. My wife was confused about this very issue. She had seen something bank sent her and thought that you had to put your money in a traditional bank to start an IRA. I helped her set up an account with a good portfolio of index mutual funds that should be much more successful than these “High Yield” CDs in the long run.

  3. zapeta says:

    I’ve gotten a couple of these offers, and I laugh when they think 2.10% is high yield. It might be something I’d consider if I were currently retired but 2.10% is not going to get me to my retirement goal.

  4. mgessford says:

    While I haven’t recently received any mailings regarding opening a “high-yield” IRA, I do actually use the Roth-variety available from my credit union as a place to stash emergency funds. The funds were stashed during years my wife and I didn’t otherwise max out our IRAs with more age-appropriate investments. I’m happier with CD-ladders where the interest is completely tax-free than paying the tax man at the end of the year. Our emergency funds, however, are truly for use in case of great familial change (ie lost job, extended medical problems, etc). Before I am jumped upon, understand we keep a “cash cushion” in our normal checking/savings accounts of 10-15% of annual income to offset other unplanned expenses (car problems and the like).

  5. eric says:

    Definitely a misnomer but I can surely see why they’re using it (it sounds good!) Thanks for filling in the details.

  6. cdiver says:

    Nothing quite like calling a sub-inflation rate a high yield!

  7. Everything’s relative. 2.10% is high compared to what they are paying on their savings accounts and what Treasury bills are yielding.

  8. dan says:

    Work all day….work all night…

  9. jsbrendog says:

    it just goes to show that numbers and words can be manipulated to show what you want them to and not what they really mean

  10. Bob says:

    If you are sitting with cash earning zero because you think “rates will jump back up any day now” then think about it, 2.10% for 30 months is way better than the nothing you are getting now.

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