Fixed Rate or Variable Rate: Which IRA is Right for You?

Fixed rate and variable rate IRAs are ideal ways to save for your retirement. You can allow the money in these accounts to grow tax free and in some cases, you may even be able to deduct them on your taxes. But choosing between a variable rate and a fixed rate IRA may be a difficult decision since there is no “right” answer. Here are some questions to ask yourself to help you choose between these two very similar yet different types of retirement accounts.

Are you a financial risk-taker or do you like to play it safe?
The answer to this question will help you choose between variable rate and fixed rate IRAs because the former is a bigger risk, especially if you are an older investor. Variable rate IRAs have an interest rate that is dependent on the current economy. The better the economy, the better your rate of return is going to be. But if you are older, this is risky because the rate of return could remain much lower than its potential for the term of the account. With a fixed rate IRA, however, you get the same rate of return each month so you can calculate your savings and know what to expect. This is a more conservative product and as such, is for the more conservative investor.

How many years do you still have to invest?
If you are starting your IRA young, a variable rate may be the best for you. Even though you don’t always get the best rate of return through the years, there will be times when your return rate will be better than if you had chosen the fixed rate IRA. If you have the account for several years, these numbers will balance out. You might even come out ahead by the time your retirement age rolls around. The fewer number of years you have left to invest before retirement, on the other hand, the less beneficial a variable rate IRA is for you. You could get stuck with a low interest rate if the economy is in a slump and stays in a slump. Consider how many years you have to invest before making your final decision.

Do you want your savings insured?
One major advantage that a fixed rate IRA has over its variable rate counterpart is that it is insured by the federal government. Fixed rate IRAs are covered by the FDIC so you don’t have to worry about your money being available as you get closer to retirement. Typically, accounts are only covered up to $250,000. But if you have this much saved up for retirement, you can always set up another account if you are worried about not having your retirement money insured.

Although there are minor differences between fixed rate and variable rate IRAs, choosing one over the other could mean a big difference in the amount you have in your account when it is time to retire. In some cases, you can switch back and forth between the two, but that is just a hassle. Choose the product that is right for you and start saving for your retirement years today!