The Internal Revenue Service offers tax incentives in Individual Retirement Arrangements (IRAs) to assist taxpayers in setting aside money for retirement. Types of IRAs include Traditional, Roth, SEP and SIMPLE. An IRA CD means that the money in any one of those types is in the form of a Certificate of Deposit (CD).
Certificate of Deposit
With a CD, you contribute a specific amount of money for a specific time period. Most often, banks offer a fixed interest rate, but some allow it to increase periodically, depending on a variety of factors including economic conditions at the time. Some brokerage firms that search for investors on behalf of banks also offer CDs that traditionally pay a higher rate of interest. When a CD matures, you may withdraw the money and interest earned or renew it at the interest rate offered at the time. If you withdraw money before a CD matures, you may forfeit some of the interest.
When purchasing a CD, you may declare it an IRA CD and deposit it into any type of IRA you choose: Traditional, Roth, SEP or SIMPLE. Usually CDs pay higher interest for longer periods, giving you an additional advantage. When an IRA CD matures, you may renew it at the new interest rate offered or roll it over into your IRA in another financial instrument, such as a brokerage account. If you take the money out as cash before retirement, you may forfeit interest and pay fines as well.
Anyone who earns taxable compensation from working and is under 70 1/2 years old at the end or the year may set up a traditional IRA. You can set one up in just about any financial institution including a bank, a brokerage firm, a mutual fund or an insurance company. You may set up several IRAs in different institutions, as long as your total contribution for the year doesn't exceed the IRS's current contribution limit, which may change annually. Check current IRS publications each year before deciding how much to contribute.
The amount you invest in any IRA CD may be tax-deductible, depending on the type of IRA, your marital status and the amount you invest. With IRA CDs in a Traditional, SEP or SIMPLE IRA, you don't pay tax on the amount you invest each year, but you do pay tax when you withdraw it in retirement. With CDs in a Roth IRA, you pay the tax on it the year you invest, but you don't pay tax when you withdraw it in retirement. On any CD IRA, you don't pay tax on the interest it pays each year before retirement.
Richard Asmus was a writer and producer of television commercials in Phoenix, Arizona, and now is retired in Peru. After founding a small telecommunications engineering corporation and visiting 37 countries, Asmus studied broadcasting at Arizona State University and earned his Master of Fine Arts at Brooklyn College in New York.