What Is IRA CD

An IRA CD pays a higher rate of interest than a savings or a money market account because you are allowing a bank or a credit union longer use of those funds. However, since one buys an IRA CD for a particular amount, most people who contribute monthly to their IRA will place their funds in a saving or money market account, then purchase an IRA CD when they have accumulated a sufficient amount to transfer.

All IRA CDs at banks are insured currently up to $250,000 by the Federal Deposit Insurance Corporation, an independent agency of the federal government. If you have an IRA CD at a credit union, it is insured by the National Credit Union Administration, also a federal agency. Not only do IRA CDs pay higher interest than a regular savings or money market account, they are safe.

Unlike a saving or money market account that has no maturity, an IRA CD has a specific maturity. Generally, the longer you commit money to your IRA CD, the more interest you will earn.

IRA CDs are very conservative investments, and they are not necessarily appropriate for a person who will not be withdrawing those funds for a long time. As a young person, you have time on your side, so you can take calculated chances with your retirement funds. Instead of putting your IRA contributions into CDs or savings, you can arrange to have those contributions made to a mutual fund company that will invest them in stocks that, over time, will grow more qulckly than an IRA CD.

Not only do IRA CDs pay a higher rate of interest than savings and money market accounts, the depositor benefits in another way. All IRA contributions are made before tax, and they will accumulate tax-free until you begin withdrawing them after you reach 59 ½ years of age. Thus, more of your contribution will be available to invest, and you will begin paying tax on the proceeds at a time when you most likely will have a reduced income.