When it comes to your individual retirement account, you have lots of options. The Internal Revenue Service puts few restrictions on the types of investments you can put in your IRA, but if safety is your primary concern, an IRA share account at a National Credit Union Administration member institution is a good option. An IRA share account is an individual retirement account that holds credit union shares exclusively.
A share account is a special account designed in such a way that they are exclusively used to hold credit union shares. These are similar in practice to deposits in a bank and are similarly insured.
Defining an IRA Share Account
An IRA share account at a credit union is similar to holding a passbook savings account in your IRA at a bank. The primary difference is in terminology. Unlike most banks, which are for-profit corporations owned by private investors, credit unions are non-profit organizations owned by their members. Banks offer deposit accounts, such as passbook savings accounts.
Credit unions offer share accounts which fulfill essentially the same function, but there is a significant difference in terminology. When a credit union members don't make a deposits, they buy shares. While deposits at a bank might earn interest, shares at a credit union earn dividends.
In practice, the difference doesn't affect account holders much. Some people prefer the level of service at credit unions or the fact that they as depositors are effectively the owners of the institution.
Opening an IRA Share Account
All IRAs are custodial or trust accounts. When you open an IRA share account, your credit union acts as the IRA custodian. You can use a share account for either a traditional IRA or a Roth IRA.
All of the same benefits that are available to any other IRA, such as tax-deferred growth of investments, are available with a IRA share account. All the same IRA restrictions, such as early withdrawal penalties, apply to IRA share accounts.
Generally, you can deposit up to $5,500 a year into your IRA accounts, or up to $6,500 if you are 50 or older. You deduct traditional IRA contributions from your taxable income when you make them and pay tax on what you withdraw from an IRA. If you make withdrawals before age 59 1/2, and special exceptions don't apply, you must pay an additional 10 percent penalty tax.
With Roth IRAs, you don't claim the tax deduction up front but your investments can grow tax-free, since you don't pay tax on what you withdraw from the account after retirement age.
Exploring NCUA Insurance
Share accounts at credit unions are insured by the National Credit Union Administration for up to the maximum allowed by law. The maximum amount was $250,000 per ownership account type per depositor, the same as Federal Deposit Insurance Corporation insurance for banks.
IRA share accounts represent a different ownership account type than regular share accounts, so you could have up to $250,000 in your regular account and an additional $250,000 in your IRS share account at the same credit union, and both accounts would be fully insured by the NCUA.
What's a Share Certificate?
If you're working with a credit union, you may also hear the term share certificate. This is an account similar to a certificate of deposit at a traditional bank that allows you to return a higher rate of interest in exchange for committing your money for a certain period of time.
It shouldn't be confused with stock certificates issued to shareholders in private companies.
Other Important Considerations
Credit union shares are among the safest investments you can put into your IRA because of the federal insurance provided by the NCUA. No insured savings have ever been lost by members of a NCUA member credit union. Because share accounts are considered to be demand deposits, interest rates offered on these accounts are usually low, comparable to rates paid by passbook savings accounts at banks.
Credit unions typically also offer certificates of deposit that provide the same level of safety with a higher yield than a share account. If you are willing to assume additional risk you might obtain greater returns by investing your IRA dollars in other types of securities, such as stocks, bonds or mutual funds.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.