Variable Rate IRA Basics

An individual retirement account, or IRA, is one of the best ways to save money for retirement. An IRA helps you save money tax-free and because of the penalties charged for taking the money out before retiring, it deters people from taking the money out of the account before their retirement. But how much do you know about a variable rate IRA?

In its most basic sense, a variable rate IRA is much the same as a variable rate mortgage. In a variable rate mortgage, the amount of money you pay each month for your mortgage depends on the ever-changing interest rate. Some months your payment may reflect a 5 percent interest rate while other months it may be much higher. This is how a variable rate IRA works but, unlike a variable rate mortgage, the higher interest rates work in your favor. The better the economy is doing, the higher rate of return you will receive on the money you have in your IRA. There is no guarantee that you will receive a certain rate which makes the variable rate IRA risky, but that also means you have a good chance of earning a great return.

Variable rate IRAs are typically more attractive to the less conservative investor. People who don’t mind taking risks often take out variable rate IRAs. There are other factors you should consider as well. For instance, if you have a diversified portfolio with fixed rate instruments, you could balance it out with a variable rate IRA.

You should also consider your age. If you are starting young in investing in your IRA, a variable rate may be ideal for you as you have several years (maybe even a few decades) for the IRA to “ride” the economy. When things are good, you will get a great return for that time. When things are bad, you can afford to wait it out since you don’t need access to those funds for many years. If you are older, however, and getting close to the age where you will start needing the money you have accumulated in your IRA, you might not want to take the risk. There is a chance you could receive a low return from now until you start using the money and you won’t get as much as you would with other IRA options.

Variable rate IRAs are also available in a variety of products. For instance, an 18-month variable rate IRA is a way that many people fund their retirement for the year. This investment product is basically a Certificate of Deposit through a bank, but you can open the CD account with as little as $25 with some banks while depositing more money throughout the year rather than making one big deposit.

Whether you choose a fixed rate IRA or a variable rate IRA, it is important to start saving for your retirement as soon as possible. Make it a habit to take some money out of your paycheck each week to contribute to your retirement savings account to ensure a decent lifestyle after you stop working.