Saving for retirement is important for people of all ages. Contributing to an employer-sponsored plan, like a 401(k) is one great way to save. It won’t always be enough though. Some employers don’t even offer those plans. That’s where an individual retirement account (IRA) comes in. An IRA let’s you save for retirement without going through your employer. There are different kinds of IRAs and the best for you depends on your individual situation and goals. In this article we’ll look specifically at an IRA CD to see if it’s something you should consider as part of your retirement savings plan.
What Is an IRA CD?
An IRA CD is simply an IRA where all the money is invested in certificates of deposit (CDs). To understand what that means, let’s look at the two types of bank accounts that an IRA CD combines: an IRA and a CD.
A CD is an account that typically offers a higher interest rate than a savings or checking account. However, your money is tied up in the CD for a predetermined length of time, known as the CD’s term. If you withdraw money before the end of the term, you will likely pay considerable penalties. A CD term could be as short as three months or as long as 10 years. The longer the term, the higher the interest rate usually is.
An IRA is a tax-advantaged retirement account that allows you to save and invest your money in a number of different ways. The IRA itself is not an investment. It is more like a home for your investments. Many people use IRA funds to invest in stocks and bonds but you could also put it into money market accounts or CDs. Regardless of which type of IRA you have or how you allocate IRA funds, the advantage is that you do not pay tax on your money as it grows. You pay tax before you contribute to the account or after you withdraw from the account, depending on the type of IRA you have.
So if you wanted to, and assuming your bank allows it, you could invest some of your IRA funds in stocks, some in bonds, put some in a money market account and then put some in CDs. If you wanted to put all of the funds in CDs, you would have an IRA CD.
Which CDs Can You Use in an IRA CD?
You can use any CD as part of an IRA. So if you’re looking to open an account, a good way to start is by comparing CD terms and rates. Some financial institutions also offer CDs that are specifically for retirement. These CDs usually have term lengths of 10 years or more. They are also likely to have higher yields and higher minimums than a CD with a shorter term.
The Pros of Using an IRA CD
Now that you understand what an IRA CD is and how one works, let’s see if it’s the right choice for you. Here are a few pros to consider.
IRA CDs are a secure way to invest your money. So long as you open an IRA CD with a FDIC-insured institution, your savings are insured for up to $250,000. Even if your financial institution fails, you’re protected up to that amount. This is not the case for other investments like stocks or bonds.
CD interest rates do not fluctuate with the market. The rate you agree to when you open the CD is the rate you will get. That predictability can help you plan your retirement savings because you know exactly how much you’ll earn from a CD.
A CD is also a straightforward investment tool. There isn’t a lot to consider when choosing one and it isn’t likely to make adjustments throughout its life. Investing in an IRA CD is easier and less time-consuming than designing and managing your own investment portfolio.
Speaking of investments, they are usually subject to management fees. Depending on how you invest, you may have to pay brokerage fees and expense ratios. Fees eat into your retirement savings and may only make it harder for you to reach your goals. With a CD, you won’t have those fees.
The Cons of Using an IRA CD
Even though CDs give you a predictable return, they provide a relatively small return. With rates that usually fall between 1% and 2%, a CD’s rate of growth is so low that it won’t always outpace inflation. If your retirement investments are mostly in an IRA CD, you won’t make as much as you would from a diverse portfolio of stocks, bonds and other investment options.
If you withdraw money from a CD before it reaches full maturity (the end of its term), you will have to pay an early withdrawal penalty. The exact penalty will vary by CD and financial institution.
Don’t forget that an IRA CD is also subject to the same rules as any other IRA. That means it is subject to the same IRA contribution limits. You will also pay the same taxes and penalties that you would owe for early withdrawal from an IRA (in addition to early withdrawal penalties for the individual CDs).
Another consideration is that CDs require a minimum investment. A long-term CD could have a minimum as high as $10,000. That naturally makes them a bad choice for people who don’t have enough to pay that minimum. At the same time, remember that CDs with a higher minimum usually have higher yields.
Who Should Invest in an IRA CD?
IRA CDs are great for conservative, low-risk investors who want security against their initial capital and a guaranteed yield. If you will retire soon or are already retired, you may want to shift some of the nest egg into an IRA CD. You will earn a relatively low return, but that could be enough if your goal is just to secure the money you’ve already saved.
Who Should Not Invest in an IRA CD?
Because IRA CDs offer a relatively low return, they are not ideal for younger investors or people who are just starting to save for retirement. Individuals who have decades before they retirement are usually better served a diverse portfolio.
You should also avoid an IRA CD if you will need to use the money that you invest. Withdrawing money early from a CD is not a good idea because of the early withdrawal penalties.
Where to Open an IRA CD
As we mentioned, you can use any CD in an IRA, but some banks have created special CDs for the express purpose of growing retirement savings. They usually offer more favorable terms in exchange for more restricted accessibility (i.e. longer terms). Here are some IRA CDs that you should consider.
Capital One‘s 360 IRA is an option if you already have another 360 savings or investment account. Savings in a 360 IRA are placed in both CDs and cash savings. A 360 IRA is available as a traditional or Roth IRA and as an individual or joint account. There are no account fees or minimums.
One of TD Bank‘s main IRA offerings is a CD account. Known as the TD Choice IRA CD, it has the same rates as TD’s standard CD savings account. TD also offers IRA Add-Vantage CDs, which grow at 0.25% APY. It works a little bit differently as you can make incremental deposits of $500 or more at any time during the CD’s 12-month term. You can deposit up to an additional $250,000 in one term. Both of these accounts require a $250 minimum deposit.
Bank of America offers a number of IRA CDs. To earn the highest APY, you’ll want to go with the Standard Term CD IRA for a 10-year term. The minimum deposit is $1,000, but it earns at 1.00%. The Featured CD IRA earns at 0.07% APY, but requires a minimum deposit of $10,000. Lastly, the Variable Rate CD IRA earns at 0.03% APY and has a $100 minimum deposit. You can choose a term between 18 and 23 months. Unlike most CDs, you can make additional deposits to your Variable Rate CD IRA without extending the term.
If you don’t mind using an online bank, you should look into Ally Bank. It offers various term lengths and interest rates. Its CD accounts also compound interest daily. The IRA High Yield CD comes in terms between three months and five years. The term length you choose will determine your APY. Ally also has a IRA Raise Your Rate CD, which grows at 1.50% on a two-year or four-year term. If your rates and balance increase during the term of your CD, you could get the opportunity to increase your rate.
The IRA CD from Northpointe Bank is very similar to Northpointe’s regular CDs, but it only costs $500 to open instead of $1,000. You can choose your term length and interest rate, from a seven-day 0.30% APY to over 60-month 1.90% APY. The plentiful options means it’s flexible no matter your goals.
PNC Bank offers IRAs as a CD or Premiere Money Market account. For the CD option, rates range from 0.05% APY for three months with balances of $1,000 – $9,999.99 to 1.5% APY for 10 years with balances of more than $500,000. The minimum deposit is $5,000 for shorter term lengths and $1,000 for any term longer than 90 days. If you have a Performance Select Checking Account, you can qualify for higher rates. It’s best to visit a PNC branch to get the most accurate information and an easier application process.
If you have at least $250, you can open an IRA CD with Citibank. Rates range from 0.05% to 1.64% APY depending on the term length. There’s a five-month promotional account that earns at 0.75% APY and an 18-month promotional account that earns at 1.01% if fixed and 1.64% if variable. You can’t apply for a Citibank IRA online. You’ll need to send a printed application, visit a branch or call an account specialist at 1-800-695-5911.
SunTrust offers CDs from seven days to 10 years, giving you the option to save for both short-term and long-term goals. Each CD term can be opened as an IRA, except the six-month account. Rates for a 12-month term grow at 0.75% APY, the 18-month term grows at 1.35% APY, the 36-month term at 1.50% APY and the 58-month term at 2.00% APY. There’s a $2,000 minimum deposit for each.
An IRA CD is a type of IRA that consists of CDs. You can use any CD in an IRA but some banks have CDs that are specifically for retirement savings. These usually have long terms of about 10 years and higher yield rates. In general, an IRA CD is a great way to invest for retirement without exposing yourself to much risk. Those who are close to retirement or already retired should particularly consider using CDs. If you have decades to go before you retire, you may not want to use an IRA CD. They’re low growth rates of 1% – 2% won’t help you as much as a diverse investment portfolio will. As with any investing decision, consider your specific situation, goals and needs before putting money in to an IRA CD.
Tips to Help You Plan For Retirement
- As you think about how you need to save for retirement, start with your monthly budget. A good rule of thumb is that in retirement, you’ll spend 70% – 80% of what you spend now. Your budget will help you figure out what that translates to in dollars.
- Saving for retirement is a challenge if you don’t earn a lot of money. There are a few tax incentives to help you though. The Saver’s Tax Credit allows low-income and moderate-income individuals to receive a tax credit for up to 50% of their retirement savings.
- Employer-sponsored retirement plans, like 401(k)s, are a great way to save for retirement. If you’re self-employed, you can still save by opening an SEP-IRA. An SEP-IRA is relatively easy to set up and has flexible rules on annual contributions.
- According to industry experts, people with financial advisors are twice as likely to be on track to meet their retirement goals. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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