How Does a Roth CD Work?
Many financial products are available for investing for retirement, including mutual funds, stocks, CDs, IRAs and combinations of products, such as Roth IRA CDs.
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Traditional IRA
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With a traditional IRA, an investor can take a tax deduction on the amount he contributes during the current tax year up to a certain limit. When he retires and withdraws the money, he must pay taxes on the interest earned on his investment. Funds cannot be withdrawn before the age of 59 and a half without incurring a penalty.
Roth IRA
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With a Roth IRA, an investor places money into the account, but can't take a tax deduction on this money. However, she does not pay tax on the money she withdraws after retirement. Whether an investor chooses a traditional or Roth IRA depends on whether she wants to be taxed now or later.
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Roth IRA CDs
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CDs are usually fixed interest instruments with a specific period of time to maturity. A CD that is structured inside a Roth IRA follows the rules of a Roth IRA. The principle is not tax deductible, but the CD enjoys tax-free growth. Contributions can be withdrawn after five years without incurring penalties. As with traditional CDs, Roth IRA CDs can be closed before their maturity date, but the investor will incur a penalty.
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