What is the difference between an IRA and a Certificate of Deposit? Pros and Cons?

Question

I have invested in Certificates for years and want to learn more about the difference between an IRA and a CD. Can someone explain these in more detail for me? What I am looking for is the best interest rate for my dollar. I don't need the money anytime soon, but don't want to be majorly penalized if I were in dire straights either.

Answer 1

You are confusing an "investment" with an account type. A CD is a savings vehicle, or investment. An IRA is an Individual Retirement Acount, a tax-favored account for working individuals to save money for retirement. Opening an IRA is a no-brainer. Everyone needs a retirement plan. But that is not an investment. Once you establish an IRA, you then have to choose the investment.

A CD is typically used for shorter-term savings. It is generally guaranteed and pays a lower rate of return. It is not going to enable you to build wealth for retirement, however, because lower yields don't keep you ahead of inflation, especially after-taxes.

Stocks are commonly used to accumulate wealth for retirement. Stock mutual funds are a great way for smaller investors to participate in a diversified portfolio of stocks that are professionally managed so you don't have to make the tough buy and sell decisions. Such funds are not going to allow you to "strike it rich" but they are going to give you the best possibility to accumulate real wealth for your retirement.

Incidentally, you can invest in mutual funds outside an IRA as well....that's because an IRA is not an investment but rather a type of account that comes with some restrictions (like a 10% penalty-tax if funds are withdrawan before age 59 1/2), and some benefits (like tax-deductible contributions, if you qualify).

Answer 2

An IRA is a totally different investment vehicle than a CD.

In a CD, the bank pays you interest in exchange for the use of your cash for 6 mos, 12 mos, etc. You always get the cash (and interest) back at the end of the term. You can also probably withdraw your cash early (although you may incur a penalty).

An IRA is an Individual Retirement Account, where you invest your money in any number of investment choices. You can invest your IRA in stocks, bonds, or other securities. It's important to note that an IRA does NOT have a guaranteed return (therefore, you may actually lose money depending on what you've invested in).

If you're looking for the best interest rate and don't want to lock up your money until retirement, I would definitely stick with liquid investments like CDs or Money Market Funds (check out HSBCDirect.com or INGDirect.com).

The main advantage is that an IRA has tax advantages. There are several different types of IRAs depending on your investment goals. It may be worth consulting a professional at your bank (they probably have different choices available). A Roth IRA allows you to invest up to $4000 per year (if you meet certain income limits) and this money grows entirely tax free. However, you can't withdraw it until retirement (with some small exceptions). A Traditional IRA allows you to deduct from your taxes the amount you invest each year (within limits), however your earnings are taxable when you withdraw them upon retirement. There are also "Educational IRAs" which allow you to save tax-free to pay for college expenses for your dependents.

Answer 3

An IRA (individual retirement account) is money that will be tied up until you retire. There are two kinds. 1) Traditional. The monies you deposit each year are tax deferred until the year you start withdrawing. And you do have to start withdrawing them at a certain age. (I don't know right off hand the age because I'm not near it yet.) 2) Roth. These monies can be withdrawn for a purchase of a home or for education and are not tax exempt. An IRA can be of any kind of investment, and since it is money you really expect to be there, you will want to be more conservative with it, such as stocks and bonds of well-established businesses.
A CD (Certificate of Deposit) has a shorter maturity term and you can roll it over in another cd or take it out.
You can purchase t-bills with a 6-month maturity, that will earn 4-5%.
Stocks that pay dividends that increase over the years are a great long term. scheme.
My investing style is long term; I gave up trying to make the quick buck. An acquaintance of mine gave up by force, loosing 75% of his portfolio value. That means stay away from penny stocks. The road to the search for that next Microsoft is broad; the success rate is narrow.

Answer 4

An IRA is a retirement account - the money is put into the account tax-free and you only pay taxes when you withdraw when you retire (with a Roth-IRA you pay taxes when you put the money in an withdraw it tax-free when you retire).

Once the money is in the IRA account you can invest it in a variety of different things - including CDs. So you could set up an IRA and invest the money into a CD - the interest rate would be the same, but you would not have to pay taxes on the interest.

The disadvantage of the IRA is that a penalty applies if you withdraw the money early - 10%. If you are withdrawing the money due to hardship you may be able to avoid this penalty.

Answer 5

Apples and oranges.........
An IRA is a tax deferred (or no tax, as with a ROTH IRA) account. You can invest in stocks, bonds, CD's or savings accounts.

A CD is just that, a time certificate with a specific interest rate. You can have a CD in your name or as an IRA Account.

Over the long term CD's make terrible retirement investments. Buy the "dummy" series book on retirement investing.

Good luck!

BTW: So far everyone above this answer hasn't a clue. You can have a CD in a bank titled as an IRA. Be very careful about taking advice from strangers. You have no way of knowing their qualifications or motives.

Answer 6

Ira Certificate

Answer 7

ira risker but limited in how much you can invest each year
cd quaranteed return, no limit, money locked in for a specific time

for you situation I suggest a money market account whihc is a fancy term for a high yield savings account

Answer 8

I had also asked this same question three times, and didn't receive a proper answer

Answer 9

traditional IRA"S interest earned each year do you count that as interest income for that year?