What Is a Certificate of Deposit?
Certificates of deposit (CDs) are a form of low risk investment that can also be very useful for IRA plans. Although the interest earned is not as high as other forms of investment, CDs are able to generate consistent, steady returns over time. The low risk comes from the fact that most CDs are federally insured. Since CDs are best invested in early on, they make an ideal way to build a retirement fund no matter which type you use.
- Traditional CD: Fixed interest rate over a set period, at the end of which you can withdraw the money or roll it in to a new CD, or transfer to another retirement product. If you elect to withdraw from a retirement CD you should consult with your tax adviser first.
- Bump-Up CD: A type of account where you can change your interest rate for a higher one at some point during the investment period. The number of times you can do this is determined by the institution.
- Liquid CD: Most CDs either do not let you withdraw before the full duration passes or assess a penalty if you do so. Liquid CDs, however, let you withdraw a portion of your deposit without penalty during the life of the account.
- Callable CD: These CD types can be prematurely recalled by the institution, immediately returning your deposit and any earned but unpaid interest. In exchange for this possible unpredictability, these CDs usually have higher interest rates.
Advantages of Certificates of Deposit
The main advantages of CDs are flexibility and security. When their duration ends, almost all CDs give you the choice to roll the amount into a new CD and continue earning interest. This means that more modest or short-term durations can be used if you are unsure how long you can afford to keep the money locked up while still enabling you to keep the investment going if it turns out you don’t need it after the CD term ends. Also, CDs held at an insured financial institution are federally insured up to the federally insured limit.
What is an Individual Retirement Account?
At the most basic level, an individual retirement account (IRA) in Ludlow or your vicinity is a way to save money for your retirement while paying minimal (or possibly no) taxes on the funds in question. There are three main types of IRAs:
- Traditional IRA: You make contributions with money which may be deductible on your tax returns, essentially deferring the tax payment until the funds are eventually withdrawn. Since retirees tend to be in a lower tax bracket than they were when the money was initially deposited, the net result is that less taxes may be paid on the amount.
- Roth IRA: You make contributions with after-tax money. Because of this, your funds grow tax-free.
- Rollover IRA: This is a type of traditional IRA that is used when moving money from employer-sponsored plans into an individual account.
Why Invest in an Individual Retirement Account?
An IRA offers several key benefits over regular forms of savings that shouldn’t be ignored when planning for retirement. Most notably, and as stated above, IRAs can be tax-deferred or possibly tax-free, meaning that you will be able to keep access to more of your money and see stronger growth than conventional savings. Additionally, IRAs offer more flexibility when looking for ways to invest and grow. This means that while an IRA may not have the employer-matching contributions like a 401(k), they can easily see comparable—or greater—growth.
It is important to remember that an IRA is not, in itself, an investment. It is more akin to a basket in which you can store other financial products and accounts as they grow for your retirement. Among the investment possibilities of an IRA (stocks, bonds, mutual funds, etc.), it is worth considering certificates of deposit specifically.
What to Consider Before Investing in an IRA CD
An IRA CD is essentially an IRA that is committed to a CD investment. While generally a highly secure approach, there are two quick things to keep in mind when creating an IRA CD.
- The relatively slow growth of a CD, compared to other investment products, means you will end up with a smaller retirement income using CDs alone than if you diversify. However, some people consider this an appropriate tradeoff given the security of a CD.
- The growth of the CD will count as a deposit on your IRA, and there are limits to how much you can put into an IRA during any given year. This means that there is an effective cap on how much you could earn from a given account every year.
Finding Individual Retirement Accounts in Ludlow, Massachusetts
LUSO Federal Credit Union is a member-owned, not-for-profit financial cooperative that is dedicated to providing members with quality financial services and products, such as individual retirement accounts, in Ludlow and neighboring areas. Among our many services, we help members plan ahead for retirement with establishing individual retirement accounts and aid them in finding ways to grow their investment through certificates of deposit and other strategies. Feel free to contact our Ludlow branch toll free at 1-844-587-6328 or our Wilbraham branch at 1-800-808-5876.
LUSO Federal Credit Union and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.