Adding Contributions to a CD IRA

By Shani Valdez

  • Overview

    There are various retirement investment vehicles available to you for making annual contributions. When reviewing your retirement options, take into account your time horizon, age and risk tolerance. Gradually rebalance your high-risk security allocation to one that's more conservatively diverse in asset allocation if nearing retirement. A CD IRA is one investment worth consideration if looking for safety and security from market downswings.
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    • Step 1

      Consider carefully which retirement plan works best for your financial situation before establishing your CD IRA account. Roth and Traditional IRA plans offer different tax benefits for contributions, earnings and withdrawals. The Roth is good for those expecting to be in a higher tax bracket at retirement, who want tax-free earnings growth and don't mind non tax-deductible contributions. Traditional IRAs are better for those who believe their tax bracket will be lower at retirement, who want tax-deductible contributions and don't mind paying taxes on the back end for earnings and contribution withdrawals.
    • Step 2

      Review IRA contribution limits to ascertain your eligible annual contribution amount. Annual contributions are the same for both retirement plans, but contribution limits are always subject to change so review them yearly. Roth IRAs require your MADI (modified adjusted gross income) to meet certain income thresholds for full or partial contributions. Traditional IRAs have income limits for tax deductibility, which is based on your MADI and if you have a work retirement plan.


    • Step 3

      Be sure to meet IRA age requirements before making contributions. You are not allowed to make Traditional IRA contributions beyond 70 1/2. However, there are no age limits in regards to contributions for Roth IRAs accounts.
    • Step 4

      Compare financial institution interest rates. Bankrate.com may be of use here as they provide national interest rate averages, an interest rate comparison search tool to view multiple bank CD IRA interest rates and initial deposit requirements.
    • Step 5

      CD IRAs require lump sum deposits. You invest money when first establishing the CD or during the ten-day grace period following the CD's maturity date. Contribute enough to meet minimum CD deposit requirements without going beyond your annual contribution limit. Mark your calendar with your CD IRA maturity date to remind you of when to renew, withdraw funds, invest money or change terms of the CD without being penalized.
    • Skill: Moderately Easy
    • Ingredients:
    • Internet
    • Possibly an investment advisor
    • Tip: The CD IRA is a conservative investment vehicle and is limited in regards to its return on investment (ROI). If you are far away from retirement and able to weather market fluctuations, higher risk securities providing better ROI on annual contributions are a smarter investment choice. If close to retirement or retiring, the stability and security offered by a CD IRA may be an appealing and appropriate investment allocation. However, don't invest all of your retirement assets in CD IRAs. While CD IRAs provide security with locked-in interest rates, they won't outpace inflation. Diversification in stock market securities is necessary to counter inflation. Therefore, go over your asset allocation and diversification carefully with an investment advisor.
    • Tip: When comparing interest rates, you will see two numbers, a rate for the current day and an APY (annual percentage yield). Truth in Savings regulations require the APY to be disclosed on interest-bearing deposit accounts. APY reflects the total potential interest earned based on the financial institution's compounding method, if funds remained in the account for a 365-day year.
    • Warning:
    • Early withdrawals may be added to your income, taxed and penalized. Consult with your tax advisor regarding early distribution tax consequences. The financial institution handling your CD IRA may also apply early withdrawal penalties or end of term penalties if no retirement distributions have been taken.

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