Capital One IRA Review, Rates, and ROTH IRA Fees in 2024

Capital One ROTH IRA review. Is it good and safe way to invest in individual retirement account? Capital One IRA rates and fees.

Capital One IRA Has Been Discontinued

UPDATE: Capital One is not providing IRAs anymore. The bank transferred all accounts to Millennium Trust. To select the best IRA account for your needs, see Best No Fee IRA Companies.

Capital One IRAs vs. Brokerage IRAs

American humorist Will Rogers has been credited with saying "I am more concerned with the return of my money than the return on my money." In a nutshell, this is the difference between bank IRAs and brokerage IRAs. Both institutions will accept your retirement account dollars, but banks are the only ones who promise to return every dollar up to the Federal Deposit Insurance Corporation (FDIC) limit. Brokerages offer investments such as stocks, mutual funds, and Exchange Traded Funds (ETFs) that do not guarantee the safety or full return of invested principal (uninvested cash is insured and guaranteed to return).

However, in the investment world, exists an absolute truth of the balance between risk and reward. If greater risk is taken, the potential reward is expected to be greater as well. But there is also a greater chance of loss. If no risk is taken, little or no reward should be anticipated.

Let's look closer at Brokerage IRA versus Bank IRA - at the pros and cons of each type of the retirement account.

Capital One IRAs Pros

Return of original principal is FDIC guaranteed up to $250,000 per account. Investments are either savings accounts or time deposits such as Certificates of Deposit (CDs). A fixed rate of interest is paid for a fixed period of time, say six or twelve months. Rates are usually higher for longer-term CDs, but in a period of rapidly rising short-term interest rates, short term CDs or even FDIC insured bank Money Market accounts (MMA) may pay higher rates than one-year or two-year CDs.

Simplicity. Account applications tend to be short and easy to understand. Choose an amount to contribute, choose a time period, make the deposit, and you're done.

Lower costs. Custodian fees may be charged to maintain an IRA but are generally low or non-existent with banks. Commissions are not charged for CDs or savings accounts.

Capital One IRAs Cons

Safety comes at a price. In today's interest rate environment, returns are at historic lows. Savings accounts and one-month CDs pay nearly 0% interest. A quick check of national rates obtained from the website shows an average rate for IRA MMAs of 0.09% APY (Annual Percentage Yield). Yields vary, and some banks may offer as much as 4.65% APY rate at CIT Bank, so shopping around is helpful. The main risk with low interest CDs is that the return will not keep pace with inflation, which causes a loss of purchasing power over time.

Portfolio management can be a minor problem. The main decision to be made is length of time for a CD. Deciding to lock in low long-term rates just before rates begin to rise eliminates the opportunity to invest in shorter-term CDs with higher APYs, so there is some opportunity risk inherent in fixed rate investments.

Brokerage IRAs Pros

A wide range of investments. Available through brokerages are stocks, bonds, mutual funds, ETFs, REITs (Real Estate Investment Trusts), and options on stocks. Some brokerages offer currencies, foreign stocks and bonds, and commodities futures.

Potential returns are greater. The historical annualized return for the general stock market as measured by the Standard & Poor's 500 Index (S&P-500) over the past 10 years is 9.25%. The largest 10-year annualized return on this index has been about 20%. Compared with FDIC-insured CDs or savings accounts, a strong case can be made for investing in equities or other high-potential investments available through a free brokerage IRA.

Brokerage IRAs Cons

Loss of principal. Remember the risk/reward tradeoff? As recently as the end of 2008, had you invested in the stock market via the S&P-500 Index on Jan.1, 1999, reinvested all dividends, and held the money in the account until Dec. 31, 2008, your 10-year annualized rate of return would have been -1.39%. A bank IRA invested in CDs during the same time would have easily outperformed stocks, since rates in the early 2000s ranged from 1.24% to 6.11% on one-year Treasury bills ( a good measure of short term yields), and the average yield over that 10-year period was about 3.5%.

Portfolio management problems and errors. With a mix of stocks, bonds, and other investments available for a brokerage IRA, an investor must make some decisions about allocating assets to various investments as well as making buy and sell decisions with individual securities. It's easy to be caught up in media hype or doomsday news headlines and buy out of greed and/or sell out of fear. Bad timing or decision-making might turn a winning investment into a loser.

High costs. In addition to trading costs and commissions, custodial fees are often greater due to more paperwork required to administer an account. There are also hidden costs such as expense ratios in mutual funds or ETFs that reduce annual returns anywhere from 0.10% to well over 2.0%.

Investments IRA vs Capital One IRA Conclusion

IRAs are great investment ideas for individuals and everyone who is eligible should have an IRA. However, choosing the right custodian — bank IRA or brokerage IRA — isn't easy. An investor needs to know his risk tolerance, financial goals, and desire and interest to learn about investment options before making that choice. Perhaps the best option is to have some assets in both — a bank IRA for security and safety and a brokerage IRA for higher returns, inflation protection, and a better chance to achieve long-term financial goals.

Continue Reading