CD-based IRA Accounts
IRA accounts are tax-deferred savings accounts that investors often use for their retirements.
Investors often make such investments because the funds deposited in IRA accounts will grow without any taxes on interest, dividends or capital gains until the money is withdrawn at maturity. An IRA asset can be a mutual fund, a specific stock or simple cash, or a CD. One of the draws to using a CD is that they are usually insured and so the investors’ assets are generally safe, despite a somewhat low return rate. Presently, the FDIC and NCUA raised the insurance limit for IRAs to $250,000 per banks and credit unions.
Most banks market CD based IRA accounts to their customers, which creates a misperception that there is a difference between CD-based IRA accounts and traditional investment-based IRA accounts. In fact, the difference is nominal, as an IRA is simply a special tax status applied to various investments, and the rules and regulations for such accounts are the same for all types of investments.
Time Frames for IRA CDs
CDs have time frames equal to the money left within the CD; in other words, a three-year CD would thus have a time frame of three years. IRA CDs differ, however, as they have various rules and regulations regarding the use of the funds. Such rules include substantial tax penalties if money is withdrawn from the account before its owner turns 59 1/2. However, an owner can purchase a new CD or have one rolled-over into his IRA account without tax implications.
Benefits
IRA accounts shield the owners from paying interest from taxes until the money is withdrawn. Because of this, IRA accounts allow the investor to accumulate additional funds for retirement, as taxes need not be diverted from their retirement goals. This allows the investor to have more money to put into his retirement.
There are other benefits to possessing an IRA CD. First, the investor is in total control of the funds as the CD is opened under the owner’s title and social security number. And second, banks and credit unions are sometimes willing to waive early withdrawal penalties. As such, if the investor can find the best CD rate elsewhere or if he simply needs the funds immediately, the investor may have the opportunity to forego such penalties.
Concerns
While CDs pay a higher interest rate than other savings and checking accounts, they traditionally do not return as much as other investments over a longer period of time. For example, an investor would be better off putting his money into some securities if he is seeking a substantial profit and is willing to absorb the risk. As such, an investor with several years until retirement may be much better served by investing for their retirement in other opportunities within their IRA rather than a CD.
