What Is an IRA CD?
Since its inception in 1974, IRAs have been a popular and easy way for Americans to save for retirement. However, those who are new to saving may not understand how IRAs work, or what types of investments can be held within them. This allows banks to market investments such as CDs to IRA account holders, whether or not they are good investments for IRAs.
Other People Are Reading
-
Function
-
An IRA, or Individual Retirement Account, is just that--an account. It is not an investment in and of itself. The money in an IRA may be invested in just about any type of investment, including mutual funds, stocks, bonds or CDs.
Features
-
CDs, or certificates of deposit, are time deposits, in which a customer allows a bank to have possession of his money for a pre-determined length of time, usually anywhere from six months to five years. The bank pays the customer interest in return for the use of his money. CDs are extremely safe investments because they are government insured, but they generally earn low interest rates, just slightly more than a savings account. Some banks offer CDs with variable rates, but fixed rates are far more common.
-
Identification
-
Although banks often market CDs as being specifically designed for IRAs--calling them IRA CDs--any CD may be held inside an IRA, not just those that are specially designated. There is nothing special about an IRA CD--although you may find a CD with very attractive terms marketed as an "IRA CD," those terms could just as easily be available on non-IRA CDs. IRA rules regarding IRA investments are quite flexible, so the money inside an IRA can be used to buy almost any type of investment.
Misconceptions
-
Customers who do not understand that IRAs are accounts and not investments may believe that opening an IRA CD is the only way to open an IRA. This is false. IRAs can be opened at almost any financial institution, including banks, brokerages and mutual fund companies--no CD required.
Considerations
-
The type of investment you wish to hold inside your IRA should dictate where you open the account. For instance, if you want to invest in Vanguard Mutual Funds, you should open an account at Vanguard, because it's the best place to buy Vanguard funds. If you want to invest in an ING CD inside your IRA, then it wouldn't make much sense to open an IRA at another bank, because the bank won't have the ING CD available.
-
References
- Photo Credit Success & Wealth image by wayne ruston from Fotolia.com
