You have an extraordinary amount of flexibility when it comes to the types of investments you can hold in your individual retirement account. The Internal Revenue Service does stipulate what kinds of investments you can put in your IRA. It lists only the kinds of things you can't hold in that account, such as life insurance and collectibles. You're free to invest in equity securities, such as stocks, or fixed investments such as bank certificates of deposit.
Account vs. Investment
You might hear the term "IRA CD" and assume it refers to a special type of investment, but IRAs and CDs are two different things. A CD, or certificate of deposit, is a special type of savings product, typically offered by a bank, savings association or credit union. An IRA is not an investment. It is a special type of tax-advantage account that you can put a variety of different kinds of investments, including CDs, into. When your bank offers an IRA CD, the IRA is the account, and the CD is the investment product.
Fixed Income Investments
Fixed income investments, sometimes referred to as fixed investments, are securities and other financial products that pay a fixed rate of return, typically in the form of interest. Government, corporate and municipal bonds, bank certificates of deposit, annuities and preferred stocks are examples of fixed income investments. When you buy a fixed income investment, you're typically loaning your money to the issuer in exchange for regular interest payments and the promise of the return of your principal upon maturity.
Interest and Maturity
Fixed investments might pay interest in a couple of different ways. Some investments pay interest on a regular basis. For example, U.S. Treasury bonds pay interest every six months. When the bond reaches maturity, you can redeem it for its full face value. Other fixed income investments maintain the interest and continue to compound that interest until the investment matures. For example, interest on a CD remains in the account and is compounded, which means you get paid interest on your interest and then receive the full value of your principal plus interest on maturity.
Maturity in an IRA
If your fixed investment is held in your IRA, the principal will go back into the IRA once the investment matures. What happens to the principal at that point depends on the IRA custodian and the terms of your IRA agreement. Some IRA custodians automatically reinvest the maturing principal back into predesignated investments. For example, if your bank serves as your IRA custodian, it might automatically reinvest your maturing IRA CD into another IRA CD. If you don't have such a designation, the principal from your maturing fixed investment will remain as cash in your IRA until you instruct your custodian what to do with it.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.