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CD stands for certificate of deposit. A CD is a higher paying investment at a financial institution. A CD is typically for a fixed period of time anywhere from a few months to a few years. You must declare any interest earned on a CD on your income taxes. There are no limits on the amounts you can invest on a CD, however there are no tax advantages to a CD either. For example, you cannot take a tax deduction for a contribution to a CD. If you withdraw the CD prior to its maturity date, the financial institution penalizes you monetarily.

An IRA stands for Individual Retirement Account. An IRA is an account you open at a financial institution. There are limits on the amounts you can deposit to an IRA in any one calendar year. The amount deposited to the IRA can be deducted from your taxes. You need to be 59 and 1/2 years old before you can withdraw from an IRA without penalty. While you can withdraw from an IRA before you are 59 and 1/2, you must pay taxes at a higher rate on the amount you withdraw. The financial institution reports to the government that you have made a withdrawal on your IRA and the IRS expects you to pay taxes on that amount.

Sorry for the long winded explanation. But that's it in a nutshell.

2006-09-05 14:08:16 · answer #1 · answered by Sabina 5 · 0 1

An IRA is a retirement account -- that means the money you put into it is in most cases not taxed when you first earn it, but only later when you begin witdrawing money after you reach retirement age (at which time you should be in a lower tax bracket). If you take money out of your IRA befroe you reach retirement age, you usually have to pay full income tax plus substantial penalties on it. There are lots of complex laws governing retirement savings, because it is intended to be a comittment (to yourself and to the economy) so it has certain tax benefits. It is best to consult a retirement advisor for decisions about IRA's.

The CD on the other hand you can cash out of it as soon as its term is up (usually 3, 6, or 12 months after you bought it) without penaties and only have to pay taxes on the interest gained. A CD is just a deposit into an interest-bearing account. You paid income tax on the money when you eraned it (before you put it into the CD), and you will pay taxes on the interest (gain) you receive from the CD. The CD is a much shorter commitment and just between you and your bank, but you still want to talk to a financial advisor or your tax accountant (if you have one) because it is possible for the interest earned from a CD to bump you up into the next higher tax bracket, thus negating all of the gain it would have had.

2006-09-05 14:15:16 · answer #2 · answered by Mustela Frenata 5 · 0 1

Think of an IRA (Individual Retirement Account)as a wrapper, which can hold many different types of investments, including Cd's (which I will define in a moment), mutual funds of stocks or bonds, practically anything, on a tax-deferred basis.

A CD is a Certificate of Deposit, which is an interest-bearing investment usually obtained from a bank.

Cd's can be held in IRAs, or out of IRAs, in which case you will pay income tax on the interest income they will earn.

So it is not a case of one being better than the other, they are quite different.

A CD could be a good choice to put into your IRA.

I hope I have provided you sufficient info. If you need more, pls. advise, I am a CPA and know about these things.

2006-09-05 14:14:31 · answer #3 · answered by Art A 1 · 0 1

Veritus is correct plus, IRA's usually mature at age 59 1/2 where a CD is short term - from 6 months to 5 years. There are also annuities to consider, like CD's but greater terms and amounts.

2006-09-05 14:09:16 · answer #4 · answered by Newt 4 · 0 1

IRAs are Individual Retirement Accounts, and thus are specifically for investing for retirement. Often, IRAs are invested in CDs. CDs are Certificates of Deposit. I recommend speaking with a financial advisor to decide what is best for you.

2006-09-05 14:00:28 · answer #5 · answered by The Pulverizer 4 · 0 1

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