IRA Certificates of Deposit: Low Risk, Plus Reward
January 28, 2009
IRAs and CDs Go Together Nicely
Using an IRA account to save for retirement is highly recommended by financial advisors of all stripes. However, not all financial advisors inform their clients as fully as they should about low risk options for IRA investing.
IRA certificates of deposit, for example, are a great way to make sure that your IRA does not lose money even if the stock market declines. CDs, fully covered by FDIC insurance up to $250,000, can help protect and balance any IRA portfolio.
Best CD Investments: It's a Numbers Game
Savvy savers are constantly searching for the highest-paying certificates of deposit. They're famous for it. And rightfully so. Banks use CD interest rates to attract new customers, so hot promotional offers come around frequently. When seeking out the highest CD rates, it's vital to look at more than one number. Sure, you want the best CD rates, but you also want the correct timeline for maturity.
Sometimes a six month CD is better for your situation than a five year CD, even if the five year CD pays a higher interest rate.
IRAs are Long-Term, but CDs Inside an IRA Don't Have to Be
An IRA account is something that should be built up over a lifetime. However, that doesn't necessarily mean that investors should simply look for the best CD rates and then buy and hold forever.
Remember: interest rates are very low right now. If you think interest rates are headed higher in the next five years, a five year CD may not be the best choice. Go for a one year CD and hope for higher CD rates in a year.
Of course there's something to be said for "set and forget it," especially in the case of an IRA account, but strategy makes a difference, too.
All the Way Up the Ladder to a Comfortable Retirement
The best CD investments produce solid yearly returns without much risk. As such, using CDs to balance out stock investments in your IRA can be a strong option.
More conservative investors may swear off stocks entirely, and use certificates of deposit as the primary or even only investment within their IRA. In that case, you definitely would want to strategize for maximum return.
Laddering is a popular strategy for CDs, and it works inside an IRA, too. By staggering the maturity dates of your CD holdings, and then buying new CDs at hopefully higher interest rates, and then doing it all over again, you can increase your rate of return on CDs quite a bit.
Almost like trading stocks, but without the stomach ache.
