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Fed Meeting Preview and Deposit Rate Forecast - Sep 13, 2023What’s So Special About an IRA CD?
One of the products gaining in popularity right now is the IRA CD. As some savers become wary of the stock market, they are turning to cash products that might provide a little more safety and security. Banks, credit unions and other financial institutions can market CDs as being especially appropriate for IRAs, but the truth is that an IRA CD really isn’t so special; it’s just a CD that financial institutions market as being ideal for inclusion in an IRA.
What Can You Put Into an IRA?
First of all, it is important to realize what an IRA is. An Individual Retirement Account is not an investment itself. It is an investment account. You can use your money to purchase different investments, which are held in your IRA. An IRA comes with tax advantages, and is meant to help provide you with income during retirement. You can use the money in your IRA to invest in almost anything you would like from stocks to funds to bonds to real estate. You can also use the money in your IRA to invest in CDs. However, you can invest that money into any CD you would like. It does not have to be a “special” IRA CD in order to be held in your retirement account.
What is an IRA CD?
In reality, IRA CDs are just plain old CDs. Financial institutions might label them as “IRA CDs”, but they have the same characteristics as other CDs. You agree to let the financial institution use your money however it would like for a set period of time. Early withdrawal penalties apply. (With CDs held in your IRA taking that money out of your IRA as part of your withdrawal can trigger penalties related to your retirement account.) Because the institution is using your money, you are paid interest. There are CDs with variable rates, but most CDs come with fixed yields.
Some financial institutions do try to make IRA CDs more attractive by offering higher yields, especially since many CDs marketed as good choices for an IRA have longer terms, usually between three and seven years. There are IRA CDs that have terms as long as 10 years. Many minimum deposits vary from $500 to $10,000, although you can almost always find CDs that allow you to put in more or less. As with any other CD, you are more likely to get higher yields with an IRA CD that has a longer term and a higher deposit.
When your IRA CD matures, the financial institution may automatically renew the CD, putting your money into a new CD of the same maturity at the prevailing interest rate, or the same rate as before. Make sure you understand what your bank will do if you do not direct that the money from your mature IRA CD be used elsewhere. Many financial institutions will notify you seven to 14 days before a CD matures, so that you can decide what you want done with your money. You can put the money from a mature CD into another investment in your IRA, but, unless you meet eligibility requirements for withdrawal from your IRA, you cannot take the money out of your retirement account. You can use the money to purchase bonds to be held in your IRA, or into stocks, or into any number of other investments in your IRA. You can even hold the money in an IRA savings account while you figure out what to do with it.
Whether or not you get a CD labeled as “IRA”, you will receive tax advantages by putting a CD in an IRA. With a traditional IRA, your contribution to the account is tax deductible, lowering your taxable income. If you have a Roth IRA, you won’t get a tax deduction, but your earnings from the CD will be tax free, as long as you follow the rules involved in withdrawal. Additionally, a CD that you put into your IRA is usually protected by FDIC insurance. This means your CD is insured for up to $250,000. (Double check to make sure you get your CD from an FDIC-insured institution.) Knowing that a portion of your IRA is FDIC-insured can provide comfort for those looking for a little more security in a retirement portfolio.
Choosing a CD for your IRA
Before you decide to put your money into an IRA CD, it is a good idea to consider your options. Realize that you do not need a CD to open an IRA. Also, you can put any CD you want into an IRA; it does not need a special label.
When deciding on a CD to put into your IRA, you should compare CDs marketed as ideal for IRAs with other CD options. Compare CD rates from a number of sources to determine what will work best for your situation. In some cases, financial institutions do offer IRA CDs with better terms than many of their “regular” CDs. In some cases, though, you might be better off simply getting a “regular” CD and holding it in your IRA.
Understand, though, that a CD in your IRA is not going to offer great returns. Like most cash products, the low risk associated with a CD means that the yields are going to be low as well. You will probably get a better return than you would with a high yield savings account, but you will still be getting a fairly low yield. Having a portion of your retirement account in cash products like CDs can add security, but you are unlikely to build wealth fast enough to meet your retirement goals if the only holdings in your IRA are CDs.
Another risk you run with adding CDs to your IRA is missing out on higher yields down the road. If you get a seven year IRA CD at 3.49% (Pentagon Federal Credit Union), and interest rates head higher during those seven years, you could be missing out on the possibility of higher yields. It is possible to build a CD ladder within your IRA, using shorter-term CDs so that you have the option of putting the money elsewhere as the CDs mature.
Bottom line: An IRA CD can be a helpful part of your retirement portfolio, depending on your situation. However, you can put any CD in your IRA; it does not need to be designated as an “IRA” CD.
If you open an IRA CD with a bank or credit union, by doing so, is that institution opening a new separate IRA account for you with them to hold the CD??
Or, the bank or CU is just opening a CD, and you need to have your own IRA account somewhere to put the IRA CD into??
If the latter, just by way of example, how exactly would one move a Bank of America IRA CD into an IRA account with Fidelity or Vanguard or Schwab, etc???
IRA CDs are handled as a separate class of account -- the titling is different, the forms are different, the government reporting is different. The terms are slightly different because of the required minimum distribution issue.
At some institutions, IRA CDs even have a different rate structure - either to encourage members to buy them or to take into account the extra admin cost for the credit union or bank.
Take nothing for granted when it comes to your IRA. "Before year end, double check on all IRA funds that moved during the year," DeVeny said. "Make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts. Look for any unexplained distributions during the year."
http://finance.yahoo.com/focus-retirement/article/110851/10-ira-tasks-to-do-before-the-year-ends
Ken, these articles full of half-baked stuff are dangerous.
Good information that you can't understand is better than bad information.
http://www.aarp.org/money/investing/info-10-2012/how-to-handle-inherited-iras.html
The second page of the article is important because it pertains to people who inherit who are not spouses or children of the original owner. The IRS has a special publication just on IRAS but you might want to read this until you can get their info.
What am I missing...as to the early RMD people and/or filing est tax vouchers???
Taxes should be deducted from taxable retirement accounts as distributions are made. Again, very large accounts require some planning. Pensioners pay as they go and the IRS expects taxes on IRA/401K distributions. It's not exactly rocket science.
I pay $150 a year to my "basement accountant". That covers several incomes, dividends, multiple interest streams and a few local investments. It's the best deal I get every year.
http://www.retirementwatch.com/TaxSample2.cfm
http://financialducksinarow.com/1663/ira-trick-eliminate-quarterly-estimated-tax-payments/
http://www.retirementdictionary.com/info-bytes/use-your-ira-pay-estimated-taxes
Hopefully, this may change the periodic payment of taxes such that one can do what is in their best interests...and by the "rules".
Everyone have a Super weekend!
Using the prior year's taxes is my Safe Harbor. I have been doing this for umpteen years and never once been sent a notice from the IRS that it was not allowed. Yet both of the articles completely ignore this method unless I missed it in the writeups. The pitance of interest I could earn these days is not going to make the IRS rich or us poorer by my method of paying lumpsum estimated taxes. The peace of mine of knowing I can put it behind me for another year is worth much more. I also pay my State Estimated taxes this same way and never got a notice from them that it was not allowed.
Sat, 2015-02-07 17:54 — janeack2 Forums: IRA Discussion Forum I have just turned 70 1/2 and will be taking my first RMD from my Rollover IRA by the end of this year. I assume it would be best to make estimated tax payments for my federal and state taxes starting in April, so I would not be charged any penalties for not having had enough money withheld this year. Or is there a better way to do this?
Alan-iracritic - Sat, 2015-02-07 18:55.
Because this latter situation is somewhat complicated, I am not going to attempt to explain the various options available in this post. I will say this: If you are retired, have significant CD interest income or dividends that you receive year-round and income from IRA distributions received in Dec., in my view you will have to make quarterly tax payments. The only question is whether you would use the annualized installment method or the normal calculation where you evenly divide the income for each of the four quarters.
Now if you are an employee or own a business that is incorporated, you could adjust your withholding (which is handled differently than estimated quarterly tax payments) at the end of the year and avoid the underpayment penalty tax.
It only works if the IRA trustee withholds the taxes for you.
Withholding taxes out of your CD interest income would occur all during the times of the year when interest is paid.
According to the method described by commenter #47, a 90% tax liability would be withheld only once and it can be done at the end of the year in December from an RMD from an IRA. From my understanding of commenter #47, using this method takes the place of any required quarterly estimated tax payments and delays paying any taxes until the end of the year.
:
The tax balance due on your 2014 return is
no more than 10% of your total 2014 tax,
and you paid all required estimated tax
payments on time.
I know the interest rates are low, but it still makes since to pay when you owe it and not all at one time.
Anyway, if you have it to give away, I cannot know anyone more desperate to get your money than the IRS.
#41 I am not "giving away" anything. This is money which we owe to the IRS and we just prefer doing it in this way. If you don't consider my way "good financial business" that is your call. I probably would not want to do business your way but that is what makes the world go round. We all do have to think alike.
However, I do realize the focus "today" is more echecking and debit cards but I'm still holding out....good luck!
And, the most sure fire way is to instruct the bank not to honor any overdraft and then close the account (after all other checks have cleared) and open a new one.
How about the next question...any idea of an answer on using a CD?
Anyone heard anything on the CD approach in #64 for fund/income to the stay at home spouse?
I gather you have no info on the CD question
If your IRA CD is in a bank, they usually handle this for you without any disruption of the remaining portion of your IRA CD. Check with your bank on how they handle RMDs.