Q: I have $47,000 invested in an IRA. The new rate will be 0.80 percent as of September 14. I am unsure whether it would be best to roll this over for another year, or switch it to a CD with a 0.80 percent rate for one year. What do you think?
A: Perhaps the key issue here is flexibility. This is not simply a question of whether to keep your money in an IRA, but also whether a one-year CD is the best vehicle for you at this juncture.
Here are some issues related to investment flexibility for you to think about:
- Is one year really the right time frame for you? It seems like under the circumstances you describe, you might benefit from going either longer or shorter. For example, some of the better savings accounts and money market accounts can provide you with a 0.80 percent interest rate, without locking you in for a year. That might prove useful if you believe that interest rates may rise in the near future, or if you anticipate a shorter-term liquidity need. On the other hand, if you don't need that kind of flexibility, why not go to a longer-term CD than one year, which would give you access to higher interest rates? The key there would be to look for a longer-term CD with a relatively low early withdrawal penalty, so you would not have to completely sacrifice flexibility for higher interest.
- Does your current IRA provider give you access to the best CD rates? It sounds as though you are already in a CD within your current IRA, and most other banks offering CDs can probably do so within an IRA account as well. So, if the issue motivating you is simply having the flexibility to shop for the best CD rates, you should be able to do that by transferring to an IRA at another bank once you find a rate you like.
- What would you gain by taking the money out of an IRA? Unless you have a traditional IRA and are at the age where you need to take required distributions (70 1/2), there seems little reason for you to incur the tax consequences of transferring out of an IRA. Since you have the flexibility to shop for rates within IRAs, is there a reason for you to give up the tax advantages?
Until you actually need the money, it's hard to see why you would move away from your IRA. In the meantime, the question is really about investment flexibility. This you should be able to achieve within an IRA, though it might mean choosing something other than a one-year CD -- or choosing another IRA provider.
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