How to Find the Best Roth IRA Rates

Have you ever wondered what the best Roth IRA rates are?

Well, you are not alone. Many people looking to start investing for their retirement think the same thing.

The problem is that Roth IRAs don’t really have rates like a savings account or CD. They are just investment vehicles (or accounts).

What is a Roth IRA?

The Roth IRA or Roth Individual Retirement Arrangement (or Account or Agreement) was created as part of the Tax Payer Relief Act of 1997. Yes, this is a US Government created retirement account. But the Government doesn’t control where the account is opened or what investments you put into the Roth IRA.

They simply allow for the creation of the account and for the specific tax treatment to be applied to it. Translation: the Government doesn’t tax your retirement earnings in a Roth IRA. This tax treatment makes it essentially the opposite of a Traditional IRA or a 401K.

Bottom line: it’s a good thing. Get on board.

It’s worth pointing out that a Roth IRA should be used for investing for retirement. That’s their intended purpose. Not fixed rate chasing. Contributions to a Roth IRA are limited each year ($5,000 in 2011) and certain income thresholds apply.

A Roth IRA is Not an Investment: No Rates

A Roth IRA is simply a place to stash your investments to give them a better tax treatment. However, you can put several types of investments in your Roth IRA, including some fixed-rate type investments. Your Roth IRA can contain the same types of investments that you do outside of your Roth IRA (i.e. taxable investing).

Within a Roth IRA you can have money market funds, CDs, individual stocks, bonds, mutual funds, index funds, and in some cases, a savings account (some local credit unions allow this).

It’s importance to note that most IRAs only have the option of the money market fund for your cash. These funds, although stable, are not FDIC Insured.

The takeaway here is that when looking into rates, you should look at what’s inside your Roth IRA. It’s what’s inside that counts! (sorry…couldn’t resist)

Check out some of the best rates on Savings Accounts.

How to Find Low Cost Investments for Your Roth IRA

While you can’t control the interest rates of return for most of your assets in a Roth IRA (see 2009 Recession as an example), you can typically control the amount of fees you’ll incur. As a general rule, the lower the need to have someone else actively manage the funds in the account, the more likely that the investment has low fees.

Therefore, an index fund is going to have lower costs than say, a target-date fund or a mutual fund. If you want to avoid management fees, stay away from managed investments.

Read anything by Mr. John C. Bogle for more on this.

Like I said above, you can also invest in a Roth IRA CD and money market funds within your Roth IRA. But these typically are temporary holding places for your cash when you’re deciding on which stock or bond fund to invest in.

No Fee and Low Minimum Balance Roth IRAs

Not every institution (bank, credit union, brokerage) treats their Roth IRA the same. Some may have high minimum balance requirements. For the beginner this can be discouraging. Here are a list of the places you can open a Roth IRA, starting with some of the low-cost brokerages.

See my list of the best online stock brokers.

Large Brokerage Firms with Roth IRAs

Vanguard – This is where I have my Roth IRA. They have no fees as long as you’re in their funds and use electronic statements. And they have very low-cost investment options.

The only downside to using them is that their funds have high minimum balance requirements. Therefore if you don’t have at least $1,000 to invest initially, you’ll have to stick your money in their money market fund until you’ve built up enough to invest.

See my walk through of the Vanguard Roth IRA account opening process.

Others you might want to check out are Fidelity, Schwab, and T.Rowe Price.

Quick Tax Tip About Roth IRAs

Did you know you can actually contribute to a Roth IRA up until you file your taxes in 2012 and have it count against your maximum contribution limit for 2011? That means you still have time to invest in a Roth IRA for 2011.

Already filed your taxes? Just start saving to contribute towards your next year’s Roth IRA.