I was considering opening a SEP-IRA with our local SECU, but they show an APY of 3.50%. Most figures I hear about are in the neighborhood of
10-12% APY. Why would the SECU be so comparatively low on their APY?
Who could I go with to earn upwards of 10% APY or higher on an SEP-IRA?
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A SEP-IRA is nothing more than a shell for investments that allows for certain tax rules as established by the internal revenue code.
Think of an IRA as your left pocket and a regular brokerage account as your right pocket. They are the same. However, your left pocket has one set of tax rules and your right has another set of rules. Now suppose your investment is a dollar. You can choose to put that dollar into whichever pocket you prefer and it's still a dollar and it's still expected to grow (or not) by the same amount. The pocket (or IRA) does nothing more than define the tax consequences.
NO IRA has a promised APY. An IRA can have myriad investments inside of it. CDs, mutual funds, stocks, bonds, REITs, etc can all be owned in an IRA each with it's own potential return. Your potential return is based (in part) on the risk associated with the investment you pick.
My guess, is that your credit union (cough, cough... idiots) has done you the "favor" of picking the investment inside of your IRA for you. Likely money market or CDs. The investments are safe and therefore have a low return. You could just as easily open an IRA and put mutual funds or some other investment inside of it and POTENTIALLY make the
10-12% return you are looking for. Remember there are no guarantees.
I'm glad you asked your questions and please continue to do so. That said, your question suggest that you have a lot of learning left to do. Before you dive into this, seek a professional that is qualified to help you. Find a fee-based CFP or even a respected friend that is knowledgable in this area. The credit union is doing you a great disservice. I speculate that the person you spoke to isn't even licensed to sell securities and therefore defaulted you to CDs.
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It's a meaningless question to ask about the APY on a SEP-IRA.
A SEP-IRA isn't an investment. It's a type of account. The return depends entirely on what investments are inside the account.
The SECU (I assume that's some credit union) APY is 3.50% because the only investments that are likely available for a SEP-IRA held at a credit union are CDs, savings accounts, and money-market demand accounts. And 3.50% is about what a CD is going to yield.
You'll have to hold your SEP-IRA at a mutual fund or brokerage company and investment in funds/stocks/etc. to *have a chance* at getting a return like that. Keep in mind that to have a chance at getting a return like that means you also have a chance at losing money, perhaps a significant amount of money. There's no place you're going to get a 10% return without shouldering significant risk.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
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A SEP-IRA is an account type, not a specific security.
You can open a SEP-IRA and inside that account, you may have anything from a money market fund or a CD to shares of the most speculative stock you can find. (what's available in a particular SEP-IRA account depends on where you opened it)
Presuming that by "SECU" you mean a local credit union, it's likely that the security in question that you're considering for your SEP-IRA account to hold is a CD - a certificate of deposit. CDs pay yields that are generally comparable to high-quality bonds. Take a look at for some comparisons.
Where have you seen "most figures" suggesting 10-12%?
For what it's worth, folks often use figures as high as 10%-12% for a projected *long*-run return on a portfolio which contains *stocks*. Not short run, nor guaranteed in any way, and not bonds or CDs. After inflation is taken into account the long-run return of large-cap equities has been more like 7-8%. But to acheive that return, there's a lot of risk involved - in some years, such a portfolio can go down a *lot*. During just the first 2-1/2 months of this year, money invested in an S&P 500 index fund (a very popular option for SEP-IRAs) would have lost more than 11%. In 2002, it would have lost more than 22%. But in the 5 years through the end of Feb, it would, in fact, have averaged about 10% gain.
So, again, where exactly did you see those 10-12% returns? What were the investments? And if you want those kinds of returns, are you willing to take the risk that along the way, you may lose money (and that there's no guarantee that even in the long-run you'll get those kinds of returns)?
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