Q: I have a 401(k) that needs to be rolled over from a previous employer. Can this be rolled into CDs while still remaining in an IRA account?
A: The short answer is yes, you can invest an IRA account in CDs. To give you a more complete picture of the options available to you and how to choose the right option, it might help to explain the nature of an IRA and then discuss whether CDs would be a good fit for an IRA.
What is an IRA rollover?
An Individual Retirement Arrangement, more commonly known as an IRA, is not a specific type of investment. It is a structure that has advantageous tax characteristics to help you save for retirement. You can use the money within that structure to invest in a wide range of investments, including certificates of deposit.
There are two main types of IRAs: traditional and Roth IRAs. With a traditional IRA, you don't pay taxes on money going into the plan nor on investment gains. It is only as the money is withdrawn when you reach retirement age that you have to pay income tax on it.
In contrast, contributions to a Roth IRA are not tax-deductible; but then you don't pay any more taxes on that money as your investments grow or when you take money out of the plan upon reaching retirement age.
Learn more: A complete guide to IRA accounts
Basically, then, IRAs offer you a choice of whether to be taxed now (in the case of a Roth IRA) or when you reach retirement age (in the case of a traditional IRA). People generally base this decision on whether they expect to be in a higher or lower tax bracket once they reach retirement age.
You can start an IRA by making annual contributions, but IRA rollovers are funded from money coming out of another qualified retirement plan such as your former employer's 401(k) plan. This allows you to leave a retirement plan without incurring any tax consequences.
Can you invest an IRA rollover in CDs?
Once you have your IRA rollover set up, you face a decision about how to invest it. For this purpose, think of your IRA rollover as a container, and you can put just about any type of investment in that container. So you can invest your IRA rollover in CDs, but you could also choose stocks, bonds, mutual funds and a variety of other investments.
Learn how these accounts differ: Compare savings accounts, money market accounts and CDs
As for CDs specifically, a key question is how many years you have until retirement. If retirement is in the distant future, you might want to adopt a more growth-oriented investment strategy than CDs provide. However, if you are retiring in a few years, CDs can be a great choice for making sure your money is safe and available when you need it. In fact, you can choose a series of CDs with different maturity dates so that money comes available as you need it for retirement income.
The final thing to remember is that, no matter what maturity dates you choose for your CDs, be sure to shop for the best CD rates because offerings from different banks vary greatly. Banks that compete for your business are more likely to consistently offer higher rates, and that fact alone may make shopping for the best rates a little easier.
More resources on retirement planning with CDs:
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