Establishing and contributing to an IRA (Traditional or Roth) is pretty simple and straightforward. There are many institutions where you can establish your IRA accounts: banks, savings and loans, credit unions, insurance companies, mutual fund companies, and brokerages. There are pros and cons to each type of institution, as we’ll list below. These alternatives represent the major options for opening your IRA, in no particular order.
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|
Institution |
Pros |
Cons |
|
Banks, Savings and Loans & Credit Unions |
Banks are well-known as some of the most stable and conservative institutions in our financial industry. For many folks, this is an assurance that there is additional safety in placing funds with these institutions, and in a way, with FDIC insurance, there is additional safety. This is mitigated quite a bit with the protections provided by law to IRA accounts. | Since banks are conservative, until recently, their options for investment of IRAs were somewhat limited. Traditionally, cash-oriented investments such as CDs and money market savings were the primary means of investment within banks. This has changed lately with some deregulation of the banks, as many offer mutual fund investments in addition to the traditional offerings. |
| Insurance Companies | While there are many arguments about the merits (or demerits) of placing annuity investments into IRAs, this is one of the options that insurance companies bring to the table. Annuity investments can provide a stable guaranteed income stream for retirement. A Qualified Longevity Annuity Contract (QLAC) is one example of an annuity used in an IRA. | Many times the products that insurance companies have to offer have significantly higher costs than can be found in other similar investment choices. Annual expense ratios run in the 2% plus range. The increased expenses are used to pay for the unique features (longevity insurance, for example) of the insurance products. |
| Mutual Fund Companies | Typically the lowest-cost providers of IRAs, with a wide variety of investment offerings. In addition, once the account is established, there often are no transaction costs for additional contributions (if the investments are no-load). This supports the concept of dollar-cost-averaging through low- or no-cost additions to the account. | Many mutual funds have minimum investment levels that make investment into the funds difficult within the IRA. This is especially true in the early years of the account when the balance is smaller. In addition, with the exception of no-load mutual funds, there can be sales charges associated with the funds, ranging anywhere from 2% up to 5% and more. |
| Brokerage | Wide variety of investment choices. Depending upon the brokerage, can be a very cost effective option, in terms of transaction costs. | Typically have a transaction cost with each contribution, which is in contention with the concept of dollar-cost averaging, as each individual contribution, if invested immediately, can generate a transaction fee ranging from $10 to $50, depending upon the brokerage. |
| Self-Directed IRA Custodian | These custodians provide access to more specialized and unique investment choices, such as real estate, private offerings, and tax liens. The custodian provides expertise in the form of attorneys and other advisors to assist in the diverse selection of investments within the IRA in order to maintain the legal status of the deferred account. | Generally the highest-cost option of all choices due to the additional back-office support. Due to the investment choices, may be very limited in flexibility. |
As you can see, there are positives and negatives to each type of institution. You need to be comfortable with your choice of financial institution to establish your IRA, as you will likely be dealing with the company for many years in the future. Although you could make a change (rollover your funds) to a different institution at pretty much any time within limits, making those changes can be a hassle, so it’s best to use careful consideration in your choice.
Sterling Raskie, MSFS, CFP®, ChFC®
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