Investors fed up with low returns on interest-bearing investments in their retirement accounts may find higher rates at hometown banks and credit unions.

In some cases, local institutions offer IRA interest-bearing investments that pay out two to three times higher returns than national brokerage and investment firms.

For example, Whitefish Credit Union Association in Whitefish, Mont., pays an impressive 3.65 percent money market rate on IRAs today, guaranteed for six months. By contrast, a recent weekly national survey of large banks and thrifts conducted showed the average yield on one-year CDs to be a mere 1.01 percent.

Savers who value safety above all else may be perfect candidates for interest-bearing investments in their retirement accounts, says Jim Ness, vice president of operations for Glacier Bank, a Kalispell, Mont.-based bank with branches serving six states.

“What it all boils down to is some people don’t want to lose principal and take on the stock market risk of losing their principal,” Ness says.

Some investors lately have spurned traditional IRA investments, such as mutual funds or individual stocks, because they view them as too risky. Local banks and credit unions are attracting these customers by offering highly competitive rates on CDs or money market accounts in IRAs.

It doesn’t hurt that CDs and money market accounts are FDIC-insured at banks and credit unions for up to $250,000 per account.

“When people don’t want to lose a cent in their IRA, that’s what we specialize in,” Ness says.

Eligibility rules

To be eligible for the higher rates, savers may have to meet certain qualifications. For example, at Whitefish Credit Union Association, purchasers must be a member of the credit union for a least one year with an individual or joint account.

The rate is based on the credit union’s normal passbook rate of 2.15 percent to open an account. The credit union adds an extra 1.5 percent to lure IRA deposits “based on our original theory that IRA money would stay around longer,” says Charles Abell, who retired as chief executive officer of the credit union earlier this month.

Abell is referring to the fact that federal rules make it less likely that depositors will withdraw money from IRA accounts before a certain age.

For example, the penalty for withdrawing money from an IRA before age 59½ is 10 percent of the amount withdrawn, unless the money is used for qualified school costs or a first-time home purchase. So, a 50-year-old normally can be expected to leave IRA money at a local bank or credit union for almost 10 years.

The rate at Whitefish Credit Union changes every six months for IRA accounts. You must also keep at least 10 percent of your IRA assets at the credit union to keep that higher rate.

“We rank first — or in the top 10 — nationwide for our rates,” Abell says.

Bigger, but lower

Meanwhile, rates often are more meager at bigger institutions.

Some investment houses, brokerage firms and national banks are paying nominal rates at about 1 percent or less for a six-month or one-year CD.

For example, Fidelity Investments is offering a six-month CD rate of 0.4 percent and 0.85 percent for a one-year CD. T. Rowe Price Investments offers a six-month CD for 0.5 percent and 0.95 percent for one-year CDs. Both those rates are for deposits of $1,000 or more.

Furthermore, many brokerage firms and national banks money markets are well below 1 percent. Money market rates at Morgan Stanley Smith Barney and Merrill Lynch are at less than 1 percent. Morgan Stanley Smith Barney recently quoted money market rates as low as 0.35 percent. Merrill Lynch is at 0.94 percent with a recent money market offering.

“When people don’t want to lose a cent in their IRA, that’s what we specialize in.”

USAA Federal Savings Bank, a bank restricted to military families, also falls short of 2 percent on a one-year jumbo CD of $175,000 or more invested.

“There may be some banks that offer higher rates but none as consistent as what you might get shopping your local banks and credit unions,” Ness says.

“Our competition is other small banks and credit unions,” he adds. “People by nature like to deal with local community banks, and we don’t want to compete (against larger banks) or advertise ourselves with higher rates. We only want to keep the money we have in town and gather local deposits.”

Heather McDonold, a spokeswoman for T. Rowe Price Investments, conceded it may be tough to compete with “mom and pop” banks or credit unions on CDs or money market funds.

“We have a different business model of what we do than ‘mom and pop’ banks,” McDonold says.

T. Rowe Price specializes in mutual funds and encourages investors to use company money managers, McDonold says. CDs are just one product among many offered by T. Rowe Price, she says.

Negotiating rates

Customers with an existing relationship to a local bank often can negotiate even better rates on an IRA, Ness says.

“It always pays to a have a standing bank relationship with your local bank,” he says.

However, new customers who do their homework also can get a good deal.

For example, West One Bank, a small bank in Kalispell, Mont., with two branches, offers 2 percent for a one-year CD for a new account of $1,000 or more, with “negotiations open” for a higher rate, says Jo Ann Craver, an officer at West One Bank.

West One also offers money market accounts that pay 2.4 percent for IRAs only, keeping with the theory that longer-term deposits on retirement accounts earn a higher rate of return.

Ness encourages savers to call the small banks in their town and ask for rate quotes.

“We also look at the relationship people have with us and are ready to help those who have the ‘set it and forget it’ mentality for IRAs, normally longer-term money,” Ness says.

Before choosing a bank, it’s important to make sure you’re comfortable with the rate and other particulars. Moving retirement money between institutions is not as easy as moving personal nonretirement assets.

The paperwork for moving any IRA money can be more complex, Ness says. For example, a custodian — the institution holding your assets — handles your IRA assets and is required to file a rollover tax Form 1099-R each time the assets are moved from one investment institution to another. Meanwhile, the receiving firm files a Form 5498, and you are required by the Internal Revenue Service to report the transaction on your taxes, according to IRS rules.

“To get something moved you have to fill out rollover paperwork regardless,” Ness says. “You can’t take possession of funds, so banks (or custodians) have to handle it. There’s a little bit more involved in paperwork.”

You can search for high-yield IRA CDs on Bankrate.com.

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