Where Should You Establish Your IRA?

Establishing and contributing to an IRA (Traditional or Roth) is pretty simple and straightforward. There is a wide variety of institutions that offer 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.

Banks, Savings and Loans & Credit Unions
Pros: 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.
Cons: Since banks are conservative, until recently, their options for investment of IRAs were somewhat limited.  Traditionally, cash-oriented investments such as CDs and Money Markets 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
Pros: While there are many arguments about the merits (or lack) 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.
Cons: Many times the investments that insurance companies have available for IRAs are a higher cost than can be found in most other investment choices.  Annual expense ratios run in the 2% plus range.
Mutual Fund Companies
Pros: Typically the lowest-cost provider of IRAs, with a wide variety of investment offerings.  In addition, once the account is established, there are generally no transaction costs for additional contributions.  This supports the concept of dollar-cost-averaging.
Cons: many mutual funds have minimum investment levels that make investment into the funds difficult within the IRA, especially in the early years of the account.  In addition, with the exception of no-load mutual funds, typically there are sales charges associated with the funds, ranging anywhere from 2% up to 5% and more.
Brokerage
Pros: wide variety of investment choices. Depending upon the brokerage, can be a very cost effective option, in terms of transaction costs.
Cons: 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.

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 for your IRA, as you will 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 be certain of your choice up front.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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