What Is a Traditional IRA Certificate of Deposit?

People looking for a safe investment for their retirement funds frequently turn to a certificate of deposit (CD). Money in a traditional individual retirement account (IRA) that is invested in a CD provides a fixed return and safety.

Function

Money put into a traditional IRA can be invested in a certificate of deposit. Since you will not be accessing the money until retirement, you can put the money in CDs with longer maturity periods which pay higher interest rates.

Safety

The FDIC covers up to $250,000 of the money in a CD in your traditional IRA in case of a bank failure.

Tax Benefits

When you contribute money to a traditional IRA, you are able to deduct the contribution from your taxes as an adjustment to income, meaning you can take the deduction on top of your standard deduction.

Qualifications

You must have taxable income and you cannot be older than 70 1/2 in order to contribute to an IRA CD. For 2010, the contribution limit is $5,000 ($6,000 if you are 50 or older).

Warning

The return on riskier investments such as stocks generally outperforms the return on certificates of deposit. Sometimes, certificates of deposit barely outpace inflation.

References

• IRS: Traditional IRA Rules
• FDIC: Insured or Not Insured?
• SEC: Certificates of Deposit