ROTH IRA vs. CDs

Video Transcript

"This is Patrick Munro, Financial Adviser, talking about the difference between IRA's and Certificates of Deposit. IRA's are very strong savings vehicles for one reason, the word tax deferral. Tax deferral means that as you put money into an IRA, it grows within that investment, and you are not required to pay taxes on the rate of return as well, so therefore, you get compounding within the investment over time. Compounding is a very important vehicle, because it allows the money that you have to grow even faster. Taxes is a drag on the investment returns, and that's what you're facing with CD's. If you place money with a bank, and they pay you interest on that, and it's outside of the world of IRA's, then you have to pay taxes on the rate of return, so in other words, a four percent CD will normally cost you in taxes about two percent, which means you have to pay approximately two percent of taxes, leaving you only a two percent rate of return. So therefore, certificates are known as certificates of disappointment, because you have to pay taxes on them. It's better to have a traditional IRA if it's available to you. This is Patrick Munro, Financial Adviser, talking about the difference between traditional IRA's and CD's."