IRA CD Advantages and Disadvantages

By Contributing Writer

  • Overview

    IRA CD Advantages and Disadvantages
    The long name for an IRA CD is "individual retirement account certificate of deposit." IRA CDs are a way to save for retirement. They are generally stable, safe and conservative investments, but they also have some disadvantages. People looking to invest for retirement may choose to use an IRA CD, or they may choose to use a different product, because everyone has different investing goals to achieve.
  • IRAs

    An IRA is an individual retirement account. IRAs are used to save money for retirement. There are several types of IRAs, but the most common are the traditional and Roth forms. In a traditional IRA, contributions to the accounts are not taxed when deposits are made, but any withdrawals are taxed. In a Roth IRA, contributions to the accounts are taxed like ordinary income, but any growth in the account or withdrawal from the account is tax free.
  • CDs

    CDs are certificates of deposit. They are safe, stable vehicles for saving money. CDs offer a higher rate of return than normal savings accounts, but that comes with reduced liquidity. Reduced liquidity means the money is "locked" in the CD for the term of the investment. If the money is withdrawn before the end of the term, there may be a penalty or the interest that was earned may be lost.

  • IRA CDs

    IRA CDs are a combination of the two banking products. These accounts are a way for savers to keep their money safe while earning a little return on their investment. The earnings of the CDs are not taxed, because the money is included in the tax-sheltered growth under the "umbrella" of the IRA. While there are many types of IRA accounts, the IRA CD is the safest and most liquid choice, even if the safety comes with a trade-off.
  • Advantages

    The advantages of an IRA CD include safety, liquidity and security. Because CDs are FDIC- (Federal Deposit Insurance Corporation) insured, the security of your money is guaranteed. Also, a CD is more liquid than other types of accounts, such as mutual funds. This means that your money is easily accessible in case of an emergency. Also, CDs are usually offered by local or national banks, unlike some investing options that are offered by shady or unknown institutions.
  • Disadvantages

    The disadvantages of an IRA CD include low yield, withdrawal penalties and fixed interest rates. Compared to other types of investments, CDs have a relatively low yield. For example, a 12-month CD may offer 3-percent interest, but a mutual fund could return 12 percent in the same time frame. Also, if there is an emergency and the money has to be withdrawn from the account, the withdrawal penalty could eat the earnings or even cost you some of the principle. The other disadvantage of an IRA CD is a fixed interest rate. If interest rates rise during the term of your CD, you cannot take advantage of the higher interest rate, because the money is "locked" behind the withdrawal penalty.

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