Are IRA CDs Worth the Lack of Risk?
March 19, 2010
As Bank of America customers may have recently noticed, there seems to be more talk of a product called a CD IRA than ever before. Fear of the stock market and Wall Street in general appears to be driving this talk.
Indeed, safety is by far the major selling point for consdering a CD IRA plan. Not only do you have the protections afforded by the IRA--deferred taxation, reduced risk of being seized by creditors--but you also enjoy the carefree easy feeling of FDIC insurance on your CD, up to $250,000 per depositor per bank.
Despite these advantages, savers who are pondering this possibility have a number of considerations to watch out for.
Rising CD Rates Ahead
Higher CD rates would be great news, right?
Not if you've recently placed a large portion of your IRA into long-term CDs at today's prevailing interest rate. Missing a 2-point move in two-year term CD rates means losing a lot of money if your CD investment is sizeable--thousands of dollars down the drain.
Emergency Access Difficult
If you are someone who is already retired and living appropriately on a modest income, you may not need to be concerned about lack of access to your IRA funds. But for those in their 50s, still working and making a good salary, the prospect of paying tax on IRA withdrawals is not fun.
Besides the tax penalties that may occur, individuals in this age bracket are often earning at their top lifetime peak during this period--making an IRA withdrawal taxable at a much higher rate than the average.
If you fall into this category, CD IRAs, composed solely of CDs with their set maturity dates and early withdrawal penalties, might just be too restrictive.
