Should You Open a Roth IRA at a Bank?

If you've decided to open a Roth IRA account, a natural question follows: Should you open that Roth IRA at a bank or a broker?

A main consideration is the choice of investments you'll get at each — and that can mean a big difference in the size of your savings at retirement.

» A refresher on how Roth IRAs work

Choosing a Roth IRA provider

Bank Roth IRAs: Most bank or credit union Roth IRAs offer a limited number of investments, usually a certificate of deposit or a money market account. These avoid the volatility of the stock market, but offer a much lower return on your money.

Broker Roth IRAs: A Roth IRA opened at an investment broker will offer a long list of investment choices. That list will include stocks and stock mutual funds, which can be volatile in the short-term, but over time tend to offer much higher rates of return than CDs and money market funds. You can pick and choose your own investments with a self-directed IRA, or use a a robo-advisor, where an algorithm picks for you based on your investing goals, time until retirement and your risk tolerance.

» Compare the best Roth IRA accounts

Figuring out which to choose can get complicated, partly because some banks also have investment advisories.

For example, you can open a Bank of America Roth IRA, where your money will go into either a low-yielding money market fund or a CD. A second option is to open a Roth IRA at Merill Edge, which is a broker and subsidiary of Bank of America. There, you'll get access to a wider variety of investments.

» Learn more about the best Roth IRA investments

Roth IRAs and risk

Thinking about the amount of risk you want to take on will help you decide where to open your Roth IRA. The upside to a savings account Roth IRA is they provide guaranteed returns, and don't come with much risk.

In contrast, the upside to a broker Roth IRA is that while there are higher risks, there is also the possibility for higher returns. This could be beneficial for a long-term goal like retirement, as that added risk can come rewards. The average stock market return from the past several decades is about 10%, not accounting for inflation. The best savings accounts and CDs currently pay about 4% — that’s the highest it’s been in years, though it's still less than the stock market's long-term returns.

During your earning years, you can use time to your advantage to continue investing and growing your retirement account. And with a Roth IRA, withdrawals of contributions — not earnings — can come out at any time without penalty. While making an early withdrawal of a retirement account could affect the overall balance of your account, you still have time to keep investing and let your money enjoy a higher rate of return.

You also aren't tied to the same investments in your portfolio forever. Instead, your risk tolerance could shift as you get closer to and reach retirement age. At that time, you could consider selling some stock investments and buying into less-volatile investments, such as bonds.

» Ready to get started? Jump to our primer on how to open a Roth IRA