Are you putting off your retirement investing because of the risk you see in the current market? Or maybe you see too much risk overall in stocks? Or maybe you have lot saved for retirement already but can’t stomach putting more into stocks.
If any of those describe you, then maybe you should consider the Roth IRA CD. A Roth IRA CD is simply a normal certificate of deposit (like the kind you get from a bank) that is housed within a Roth IRA. Therefore, with a Roth IRA CD, you get the tax advantages of a Roth IRA with the security that comes from a CD. Here’s how a Roth IRA works…
Roth IRA Basics
A quick refresher on Roth IRAs. A Roth IRA is a retirement account created by the federal government where you can invest today’s after-tax dollars (up to $5,000 annually) and never pay taxes on the earnings from those funds if you withdraw them in retirement.
Since retirement is a long ways off, and you have many years to earn money on your savings, you’ll make a lot over the years. Not having to pay taxes on those dollars is pretty sweet. And because you are using after-tax dollars, your money invested is more flexible than other retirement accounts.
You can see why someone would want a CD within a Roth IRA. Earnings from the CD wouldn’t be taxed.
One other note about Roth IRAs. Your annual contributions are limited. So if you didn’t contribute 5,000 to your Roth IRA last year, then you’ll never be able to do it. You’ll have to start with next year’s Roth IRA contribution limits.
Why does this matter? Well, my point is that you should never let the craziness of the market deter you from investing in your Roth every year. If your squeamish about the market, just use a CD within your Roth IRA. Here’s more on that…
Certificate of Deposit
A CD is a simple financial savings product offered by most banks. You deposit money into the bank and you are given a CD. This CD then matures based on a predesignated future date. This can be anywhere from 3 months to 10 years.
Ultra-conservative types like to use CD’s as a major means of saving for retirement. They use a CD laddering strategy to maximize their returns. The FDIC insurance of $250,000 that comes along with the CD makes it attractive to people trying to preserve their capital and eliminate most risks.
In the past, you couldn’t invest in a CD within an IRA. Most people used money market funds to hold their more conservative portfolio sections. But money market funds don’t have FDIC insurance. And nowadays, banks, online stock brokers, and even mutual fund companies are offering Roth IRA CDs.
The downside of CDs is that you limit your investment returns. In my opinion, long-term stock investing is still the way to go to save for retirement. But I can see how others would think differently. And who knows, maybe a Roth IRA CD is in my future. Here’s more on where to open a Roth IRA CD…
Where to Open a Roth IRA CD
I browsed through my list of the best online stock brokers and I found that both Scottrade and ShareBuilder explicitly state that they provide Roth IRA CDs. I also see that the mutual fund companies Fidelity and TDAmeritrade do as well. Lastly, I see that one online bank offers a Roth IRA CD: Discover Bank.
Do you have a Roth IRA CD as part of your retirement portfolio? Would you consider moving your current CD investing into a Roth IRA?