What Are the Benefits of an IRA CD?
IRAs are accounts that are used to save for retirement. The money in these accounts can be put in a wide variety of investments, including certificates of deposits. In addition to the higher interest rate CDs offer over other bank accounts, IRAs also offer additional tax breaks, depending on the type of IRA you contribute to.
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Tax-Sheltered Status
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All IRAs are tax-sheltered accounts, which means any money you put in the account will grow tax-free as long as it stays in the account. Therefore, when the CD in the IRA pays you interest, you do not have to pay taxes on the earnings.
Traditional IRA CDs
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When you put money into a traditional IRA, you can take a tax deduction on your taxes for the amount you contributed. If you had simply invested in a CD, you would not have been allowed to take the tax deduction.
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Roth IRA CDs
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When you put your money in a Roth IRA, you do not receive a tax deduction, but you are able to withdraw all of the money tax-free at retirement. For example, if you invested in a certificate of deposit with the money in your Roth IRA, all of the money and earnings would come out tax-free at retirement.
Security
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Like regular CDs, IRA CDs are protected by FDIC insurance for up to $250,000 per person, per institution, in case the bank fails. If you have all of your IRA in a mutual fund and the financial institution goes bankrupt, you could lose your investment because it is not covered.
Warning
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Though CDs usually pay a higher rate of interest than other bank accounts, you should consider investing at least a portion of your IRA in more risky investments, like stocks and mutual funds, because of their higher rate of return over the long term.
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