best way to invest - IRA or CD?

Question

my mom gave me $10,000 as a gift and am wondering the best way to invest it, whether it is long term, short term, CD or IRA - maybe ROTH.. not sure what is the best? i have my pension in stocks but am not comfortable even to risk 10K on my own. i am married, living in NJ and we make less then $70k.

i am leaning toward ROTH, but am not exactly clear on it, can i just put in the $10,000 or do i have to contribute EVERY year?
thanks

Answer 1

I would invest your money toward retirement. A Roth IRA is a retirement account. I'm not too clear about situations where people have more money to INITIALLY invest than the contribution limit.

Since you have $10,000, the government says you can only put in $4000 for 2007. But if you sign a letter of intent (LOI) on mutual funds, you are allow to put in more than $4000. Most letter of intent minimums are $25,000. That means, within 13 months, you agree to invest a total of $25,000 over the 13 month period. I don't know if this a loophole in the system since IRAs are funded by mutual funds, stocks, and/or bonds. Are LOI an exception to the contribution limit? It would be best to contact a tax advisor on this situation. I've been trying to find the answer in the IRS website and found nothing.

Anyway, since you have $10,000. I would invest $300/month into a Roth IRA. Put the rest into a money market account or maybe onto an online savings account such as EmigrantDirect or ING Direct or Citibank E-savings. All earn interest of around 5%. Why should you invest every month instead of making one large deposit every year? Well, stock market tends to fluctuates every month. So, you don't know if you are buying shares when prices are high or when they are low. If you undertand the dollar cost averaging concept, you would invest the same amount on the same day of every month. Whatever contribution you have left over, then you will max out your Roth IRA (which is December or during the first 3 months of the next year).

Answer 2

First and foremost you have to understand the difference between and IRA and a CD.

An IRA (Individual Retirement Account) is essentially an account that allows you to enjoy tax free or tax deffered earnings.
There basically two types of IRAs:

Traditional IRA's and Roth IRAs. With Traditional IRAs anyone above the age of 18 that works and earns money can put thier money in one. There are no income limits - so it doesnt matter how much you make a year but max contribution is $4000 per tax year. ($5K if you are over 50).

Roth Ira's are different. You said you make less than $70K so you are within the income limits. Contribution amounts are the same but the biggest difference between the two is Roth IRA's grow tax free- so you won't get a tax deduction now but you won't need to pay any taxes on the earnings later.

Traditional Ira's are tax deductible so you save on taxes now.

IRA's are funded in 3 ways. You can have an IRA through a Money Market, CD or Mutual Fund. IRA's have penalties if you withdraw the money before the age of 591/2. So they are basically long term. With that being the case you are far better off with Mutual Funds (even if its conservative) because in the long run have you will not get any type of growth on IRA's if you have them in CD's or Money Market accounts.


Now a CD (certificate of Deposit) is basically a "time deposit" that you put money into and you can't withdraw from it until it matures (otherwise you are penalized). Maturity dates typically range and interest rates tend to depend on how long you put your money away. CD's are for the most part short term investments. Anything 1 year or more you are better off with Mutual funds other types of investments.

With regards to the funds. If you aren't really going to need the money anytime soon. Invest it. If you are putting money in an IRA just be aware that you cannot put the entire 10K in an IRA.

Remember when it comes to investing, investment success is not about the markets its about the investor. There is a reason why the S&P 500 in the past 15 years have averaged 12.3% whereas individual investors have netted only 3.7%

If you need more help. Meet with an advisor or better yet stop by a Bank. Banks are now in a new trend of broadening the services that they offer. The benefit is that they offer a wholistic approach when it comes to investments and they typically do not charge a fee. Hope that helps

anything more feel free to shoot me an email.

Answer 3

No matter what type of IRA you choose, either traditional or Roth, you DO NOT have to contribute every year. The max is 4k a year, but you could deposit the 10k and just leave it, if you wanted (you wouldn't be able to make a lump deposit all at once, however). Keep in mind that IRA's with brokerage houses will allow you to invest in securities within that IRA account. You could also do an IRA CD or a regular CD. You can never lose your initial investment with a CD, you just earn interest. It's pretty much the safest investment.

It depends on how old you are whether the traditional or Roth IRA is a better choice. With a traditional, you get a tax deduction for your contributions every year, but have to pay income tax on every distribution made. It assumes that you're in a higher income tax bracket when your contributing, so you could use the tax deduction and then when you are elderly, making distributions, you will be in a lower income tax bracket and will not be taxed so heavily. With a Roth (which is better for the younger investor), you get no tax deduction for your contributions because it is assumed you are already at a lower tax bracket anyway, because you are not making much money. When you are ready to make distributions, you can withdraw the money tax free.

Keep in mind, whatever type of IRA you choose initially, you can always convert to the other type of IRA later down the road.

Answer 4

Well an IRA isnt an investment itself. It is an individual retirment account that you buy investment in. You can buy a CD in an IRA for instance. IRAs are for retirment. If you have money that you need for retirment, put it into the ira and any earnings are tax advantaged. A tradiditional IRA, you pay no taxes up front but pay taxes when you ritire. A Roth IRA, you pay taxes up front but all gains are tax free when you retire. If you are young, you should put the money in an IRA and buy broad based mutual funds or index funds that own stocks, and just let them sit. Older you are, less risk you want, because you have less tiem to wait for a stock market recovery of it crashes, so you would want more bond funds. If you are only saving this money for the short term and are not willing to take the risk that you could lose a lot, you should get it into just a normal CD. It will have a relatively low return and you will pay taxes on the gains, but it is safe and you will have acess to it in the short run. CDs have a term like 3 months, 1 year, 3 years and so on, where you wont be able to touch the money if you need it, but the rate is locked it. If you arent sure when you will need the money, put it into a money market mutal fund, which is liek a cd, but the interest rate is variable and you can take the money out whever you want. Only invest in stocks in the short term (less then 5 years) if you are willing to take the risk that you could lose some of that money. Broad base stock investing is very safe in the long run, but very risky shorter your timeframe is.

Answer 5

1. you don't have to contribute every year- but you should
2. Roth is a great idea. Contribute $4k for 2006 and $4k for 2007. Put the other $2k in a CD or have fun with it.

A Roth IRA is not any more or less risky than a CD. You can have a CD in a Roth or traditional IRA. It does not have to be in stocks. It can be in a money market savings if you want. An IRA is not the type of investment, it is just the holding vehicle. Just like a Ford is not better than a Chevy (I know you can argue that, but I am just making a point not a statement about the cars) it has more to do with what you put IN them than what they are themselves.

Answer 6

A Roth can be a CD. You would set this up at the bank and the interest would grow tax free. You can contribute $4000 for year 2006 ( by April 15th 2007) and $4000 for 2007 to a ROTH . You do not have to contribute every year. Keep in mind...depending on your age..a CD will barely keep place with inflation....best bet may be to have a ROTH invested in a CD...and half into a mutual fund ( be it bond fund or equity). Depends on your risk tolerance and age. Any other questions e-mail me.

Answer 7

There is a $4,000.00 per year on IRA contributions. You do not need to contribute every year though. It can just sit there, but you might have to pay an annual fee. I suggest to open a ROTH now, put $4,000.00 in as a 2006 contribution (you can do that up until tax day), and $4,000.00 for 2007.

Find a good broker that will tell you what the best way is for you to invest the money.

Answer 8

You can't put $10,000 into a ROTH IRA immediately. There is a yearly maximum.

ROTH IRAs are good because any money that you make from the IRA (not what you contribute) is tax free when you take it out at the appropriate age.

Answer 9

I agree with AJ, IRA is best.

The maximum contribution is $4,000 annually, so you could put the balance in a short-term CD for the ensuing years. (ADD: After reading below--Paula is right. You can put $4,000 in now for 2006 and $4,000 for 2007.)

Contributions to a ROTH are not tax-deductible (as opposed to a regular IRA, which is tax-deferred), but distributions can be tax-free if certain circumstances are met.

Answer 10

For a long term investment a IRA provides a much higher return possibility. There is a risk of loosing money however the rate of return can be more then twice that if a CD

Cd's provide security in return, a locked in rate and a guarantee that you wont loose money, You just don't make as much money.

Talk to a financial adviser if for a reputable company. Transamerica and Fidelity are two respected financial planning companies