An IRA CD (Certificate of Deposit) offers guaranteed income at higher interest rates than savings accounts or money market funds, while being immune from the ups and downs of the stock market.
A traditional IRA allows you to contribute up to $5,000 ($6,000 for those age 50 and over) in tax-deferred income–money you can shovel into the account before Uncle Sam takes his cut of your yearly income.
As CDs expire, accumulated funds roll over into new CDs. Contributions and interest grow and compound year-to-year, decade-to-decade, whether you contribute the maximum $5,000 or a partial amount or nothing. Withdrawals (distributions) can begin at age 591/2 without penalty.
For traditional IRAs, a 10% penalty is attached to funds withdrawn before age 59½, although the penalty is waived if the money is used for a “first-time” home purchase, educational expenses or qualifying hardship.
Taxes on distributions are based on one’s income tax rate at the time of distribution, a crucial benefit since most people’s tax bracket is much lower in retirement. Minimum distributions must begin before age 701/2 or face penalties.
A Roth IRA is similar to a traditional IRA, with two main differences. Annual contributions are made in after-tax instead of pre-tax money. In other words, you pay taxes when you make your contribution. Also, there is no penalty for early withdrawal of contributions that have been in the account for five years. And since taxes were paid before contributions, there is no tax on contributions or interest upon withdrawal.
With companies cutting back on retirement benefits, an IRA is one of the best personal safety nets available. There is no age minimum for starting an IRA, so anyone from an entrepreneurial teenager to an older worker can open one. IRAs are a smart move for all working-age people, especially for young professionals, and they offer a particularly powerful way to achieve financial security.
Let others chase the stock market like rabbits. For IRA CDs, the race always goes to the tortoise.
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Daryl Newell is Director of Consumer Banking at Urban Partnership Bank with nine convenient locations in Chicago’s urban neighborhoods. Call 773 420.5050 or visit upbnk.com.