IRA vs CD - which is right for me?

[Justin93]

#1 thing, which was mentioned already... Put enough into your 401k to get the match. After that, build 6 months worth of savings. Then look at short-mid term goals (savings or CD honestly not that much of a difference anymore). Then fund an IRA, depending on your income it could be roth or traditional.

[Jazzzy]

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@mongstradamus wrote:
From what i understand about roth ira , there is no penalty when you withdraw early since you are already paid tax on your contribution. Roth IRA is in contrast to 401k and traditonal IRA because you can withdraw early without penalty. Somebody can correct me if I am wrong about that. 

Also for short term investment like 1-2 years. Only way i would go is safely with an high yield online savings account or an cd. 

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My understanding is that if you are younger than 59 1/2, you can withdraw from your Roth if the money has been in it for at least 5 years. If 59 1/2 you can withdraw at will...but there are no mandatory withdrawal rules. That's what's nice about Roth....it can grow forever, and the taxes were paid at the time the money was contributed. All the growth is tax free.

That being said, I love Roth for that reason, but I wouldn't use it for short-term savings for a down payment.

[bobebob]

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@mongstradamus wrote:

You can also go with Roth IRA , where you can withdraw any amount with no penalties.

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Not true. Only the contributions may be withdrawn, and only after the account is 5 years old.

Edit: IRS publication 590 indicates that the 5 year rule does not apply to IRA accounts.  

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@Revelate wrote:

If you need the money in the 1-2 year time frame, putting it in the market (even the SPY index) doesn't make sense to me: stocks or the market as a whole can go down in that time frame and not be there for a mortgage down payment.

Carrying it in a guaranteed investment is likely a better choice in his scenario. Longer term I think SPY is a good choice.

Withdrawls from either IRA type still has to be for a qualified reason: namely to be penalty free it needs to be for a first time home in this example.  Roth IRA's still have a 10% penalty otherwise as i understand it, though that might be on gains rather than the initial investment I've never looked seriously into it.

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 It is just on the gains.  The initial contributions may be withdrawn without penalty or taxes once the account is 5 years old.

See edit above.

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@Jazzzy wrote:

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@mongstradamus wrote:
From what i understand about roth ira , there is no penalty when you withdraw early since you are already paid tax on your contribution. Roth IRA is in contrast to 401k and traditonal IRA because you can withdraw early without penalty. Somebody can correct me if I am wrong about that. 

Also for short term investment like 1-2 years. Only way i would go is safely with an high yield online savings account or an cd. 

******************************************************

My understanding is that if you are younger than 59 1/2, you can withdraw from your Roth if the money has been in it for at least 5 years. If 59 1/2 you can withdraw at will...but there are no mandatory withdrawal rules. That's what's nice about Roth....it can grow forever, and the taxes were paid at the time the money was contributed. All the growth is tax free.

That being said, I love Roth for that reason, but I wouldn't use it for short-term savings for a down payment.

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Under 59.5, you can only withdraw the original contributions.   Also, even if you are over 59.5, the account has to have been open for 5 years.  So open one before you are 55 or you might limit yourself compared to pre-tax accounts.

See edit above.

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@Anonymous wrote:

I am pretty new to understanding my finances so please bear with me. I am currently looking for ways other than my savings account to save money for the future. I am in a not so good situation at home and am trying to improve my credit and save money for a future home. Obviously this isn't an overnight thing and I am hoping to find something in the length of about 2-3 years (which I can later renew) as well as saving for retirement. I'm not sure which is better for me, an IRA or a CD? Is it possible to do both?

I'm also going to get more information on a 401(k) when I return to work this week.

Message Edited by tira on 07-20-2009 03:05 PM

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If you are saving money for a house, none of the retirement vehicles are particularly useful to you.

A standard savings account at a bank is only 0.25% or so.  Even two-year CD's with large minimums aren't getting much over 1%.

With the short time horizon, about the best you are going to do is an on-line bank like Cap One 360 (formerly ING).  I'm getting 0.75% currently.  That's significantly higher than a regular bank savings account but not quite as high as CD's.  No minimums with this account.

If you use CD's as a vehicle to save money for a house, you will need to time the purchase so you can get your money back out of the CD's when you need it.  This would add a lot of complexity to the home purchase.  Better to get a slightly lower interest rate and gain the flexibility.

You could get higher returns by getting into the market using an index fund.  But 2-3 years is too short to count on a particular return for a mortgage downpayment.

[Jazzzy]

If you are saving money for a house, none of the retirement vehicles are particularly useful to you.

A standard savings account at a bank is only 0.25% or so.  Even two-year CD's with large minimums aren't getting much over 1%.

With the short time horizon, about the best you are going to do is an on-line bank like Cap One 360 (formerly ING).  I'm getting 0.75% currently.  That's significantly higher than a regular bank savings account but not quite as high as CD's.  No minimums with this account.

If you use CD's as a vehicle to save money for a house, you will need to time the purchase so you can get your money back out of the CD's when you need it.  This would add a lot of complexity to the home purchase.  Better to get a slightly lower interest rate and gain the flexibility.

You could get higher returns by getting into the market using an index fund.  But 2-3 years is too short to count on a particular return for a mortgage downpayment.

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Can I ask what index funds you use or would recommend? Right now I have almost all my retirement in a Roth and will be rolling over the non-Roth accounts into Roth when I can do it at a better tax rate.

I am almost 64, but am hoping I never need to touch my retirement accounts and hope to leave the Roth to my children...so I prefer to be rather aggressive in the market. Right now I am in individual stocks, but the time commitment is too much to monitor them. I am considering transferring everything into either index funds or ETFs.

Target funds don't work for me because they are very conservative for investors my age...and rightfully so...but I don't intend to be taking disbursements in the near future, if ever. Right now I am with TDAmeritrade, but have thought about moving to Schwab or Fidelity. Do you have a favorite?

I was self-employed most of my adult life and didn't save as aggressively as I should have. Also raised 5 kids in the process and paid for their college educations. So....I'm looking at a bit over $200k in the Roth right now, but contributing as aggressively as possible. Looking at a long time horizon that would be not typical for a 64 y/o. (Other income is sufficient to live on going forward...)

You certainly seem to understand investing, and I would appreciate any insight you can give me. Thanks in advance.

[bobebob]

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@Jazzzy wrote:

If you are saving money for a house, none of the retirement vehicles are particularly useful to you.

A standard savings account at a bank is only 0.25% or so.  Even two-year CD's with large minimums aren't getting much over 1%.

With the short time horizon, about the best you are going to do is an on-line bank like Cap One 360 (formerly ING).  I'm getting 0.75% currently.  That's significantly higher than a regular bank savings account but not quite as high as CD's.  No minimums with this account.

If you use CD's as a vehicle to save money for a house, you will need to time the purchase so you can get your money back out of the CD's when you need it.  This would add a lot of complexity to the home purchase.  Better to get a slightly lower interest rate and gain the flexibility.

You could get higher returns by getting into the market using an index fund.  But 2-3 years is too short to count on a particular return for a mortgage downpayment.

---

Can I ask what index funds you use or would recommend? Right now I have almost all my retirement in a Roth and will be rolling over the non-Roth accounts into Roth when I can do it at a better tax rate.

I am almost 64, but am hoping I never need to touch my retirement accounts and hope to leave the Roth to my children...so I prefer to be rather aggressive in the market. Right now I am in individual stocks, but the time commitment is too much to monitor them. I am considering transferring everything into either index funds or ETFs.

Target funds don't work for me because they are very conservative for investors my age...and rightfully so...but I don't intend to be taking disbursements in the near future, if ever. Right now I am with TDAmeritrade, but have thought about moving to Schwab or Fidelity. Do you have a favorite?

I was self-employed most of my adult life and didn't save as aggressively as I should have. Also raised 5 kids in the process and paid for their college educations. So....I'm looking at a bit over $200k in the Roth right now, but contributing as aggressively as possible. Looking at a long time horizon that would be not typical for a 64 y/o. (Other income is sufficient to live on going forward...)

You certainly seem to understand investing, and I would appreciate any insight you can give me. Thanks in advance.

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I am invested in Vanguard Institutional Index Fund and my 401k plan's large cap stock fund.   The Vangard mutual fund is  an S&P 500 index fund. 

I chose them both for a balance between growth and risk.  I am comfortable with taking some additional risk to get better returns in the long run.

I recommend using Morning Star to research funds on your own.  You can compare many different funds there and get some idea of the risk involed with each.  I like index funds because they out-perform most actively-managed funds and have lower fees.

I appreciate the complement, but I feel like I am just getting a grip on all this myself.  

[Insaniak]

What is a SPY? After reading this that sounds like a great investment without much risk for the amount of gain.

[compassion101]

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@Insaniak wrote:

What is a SPY? After reading this that sounds like a great investment without much risk for the amount of gain.

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It's an EFT. Basically goes up and down the same that the S&P index goes up and down (corrected for how long till dividend pays). You also get a dividend of around 2% a year currently. It incurs very low fees. IIRC I think it's in the neighborhood of 1/10 of 1 percent, which is lower than pretty much anything else as far as funds. But there is certainly risk. The market does go down and doesn't always recover quickly. It is possible to have less money a few years after investing than you originally had. But the odds of a gain are excellent. You must weigh your own tolerance for risk.

Read their prospectus here. If you want to buy just go over to an online brokerage site (TDAmeritrade, Sharebuilder, etc) and sign up. Purchase the stock ticker SPY. They will help you if you aren't sure how. Keep in mind that if you are not buying from your IRA account, there may be taxes to any gains. Plan to hold on to it for at least a year in order to lessen or possibly avoid taxes altogether on your profit (depends on your tax bracket).

[compassion101]

I should add that the best way is to have your IRA make the investment. 401k too if it's allowed but probably isn't an option for 401k.

[coterotie]

If you don't want to monitor individual stocks, but want to have gains that don't necessarily track the overall market, sector ETF's are a great way to go.  For example, many people feel Europe is about ready to catch up economically, that is they are where we were in 2009.  So you could buy the IEV.  If you think that biotech has a bright future you can buy the IBB or if you like utilities the XLU.  By buying the ETF you are getting exposure to the stocks you might like, for example Gilead in the IBB, without the risk that if the individual stock tanks your account tanks.  I actually like this approach more than traditional managed mutual funds.  I might like a manager's holdings today, but he could liquidate that entire position tomorrow, which I might not agree is the best course of action.

An example is the s and p 500 is very bank heavy and internationally exposed.  You might want to balance this with some mostly domestic etf like the XLU or the RUT.  The XLU will perform poorly in a rising rate envioronment while the banks will likely perform better.  When rates fall the XLU will go up while the banks will go down.  So your overall return might be lower in the short term, but much greater in the long term.  The RUT can also be used as a similar hedge.

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@Jazzzy wrote:

If you are saving money for a house, none of the retirement vehicles are particularly useful to you.

A standard savings account at a bank is only 0.25% or so.  Even two-year CD's with large minimums aren't getting much over 1%.

With the short time horizon, about the best you are going to do is an on-line bank like Cap One 360 (formerly ING).  I'm getting 0.75% currently.  That's significantly higher than a regular bank savings account but not quite as high as CD's.  No minimums with this account.

If you use CD's as a vehicle to save money for a house, you will need to time the purchase so you can get your money back out of the CD's when you need it.  This would add a lot of complexity to the home purchase.  Better to get a slightly lower interest rate and gain the flexibility.

You could get higher returns by getting into the market using an index fund.  But 2-3 years is too short to count on a particular return for a mortgage downpayment.

---

Can I ask what index funds you use or would recommend? Right now I have almost all my retirement in a Roth and will be rolling over the non-Roth accounts into Roth when I can do it at a better tax rate.

I am almost 64, but am hoping I never need to touch my retirement accounts and hope to leave the Roth to my children...so I prefer to be rather aggressive in the market. Right now I am in individual stocks, but the time commitment is too much to monitor them. I am considering transferring everything into either index funds or ETFs.

Target funds don't work for me because they are very conservative for investors my age...and rightfully so...but I don't intend to be taking disbursements in the near future, if ever. Right now I am with TDAmeritrade, but have thought about moving to Schwab or Fidelity. Do you have a favorite?

I was self-employed most of my adult life and didn't save as aggressively as I should have. Also raised 5 kids in the process and paid for their college educations. So....I'm looking at a bit over $200k in the Roth right now, but contributing as aggressively as possible. Looking at a long time horizon that would be not typical for a 64 y/o. (Other income is sufficient to live on going forward...)

You certainly seem to understand investing, and I would appreciate any insight you can give me. Thanks in advance.

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[Jazzzy]

coterotie...thanks for the input. I have been meaning to gravitate towards ETFs for a long time. I have been pretty frozen with my individual stocks...which was probably good, because I held them through the entire downturn. Watched them go down. Watched them come back up. But there are some that definitely need to go. Thanks again.