topic Re: IRA vs CD - which is right for me? in Personal Finance

IRA vs CD - which is right for me?

Anonymous — Mon, 20 Jul 2009 22:05:23 GMT

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

Re: IRA vs CD - which is right for me?

JoeBJay20 — Mon, 20 Jul 2009 22:14:38 GMT

If you're looking for a short term investment, then a CD is the way to go. An IRA is for retirement, you can't withdraw from that account without a penalty until you are at least 59 1/2 years old except for very specific exceptions. The IRA is a long term investment. You definitely can (and should) do both, as there are limits as to how much you can contribute to an IRA on a yearly basis, and a balanced portfolio has a mix of short term and long term investments.

Re: IRA vs CD - which is right for me?

Anonymous — Mon, 20 Jul 2009 22:36:29 GMT

Thank you for your reply. I am checking out bankrate.com and the amounts needed to open a CD are higher than what I have available. The ones that I have enough to afford are lower rated and banks I'm not familiar with. Is starting out always this frustrating or is it just me?

Re: IRA vs CD - which is right for me?

Anonymous — Tue, 21 Jul 2009 00:45:16 GMT

@Anonymous wrote:
Thank you for your reply. I am checking out bankrate.com and the amounts needed to open a CD are higher than what I have available. The ones that I have enough to afford are lower rated and banks I'm not familiar with. Is starting out always this frustrating or is it just me?

LOL. No it's not you. I have been frustrated by finances for many decades. Believe me you are not alone.

Time can heal all wounds and a low FICO.

Re: IRA vs CD - which is right for me?

mongstradamus — Wed, 26 Mar 2014 02:45:35 GMT

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

Re: IRA vs CD - which is right for me?

compassion101 — Wed, 26 Mar 2014 04:40:41 GMT

Definitely contribute to your 401k to the maximum your employer will match.

Other than that, you can open an IRA and pull out up to 10k from it later to buy a house with no penalty, but you will have to pay regular taxes on the 10k.

A better suggestion IMO would be that if your taxable income (income after tax deductions) is expected to be less than 36k over the next couple of years, just open a brokerage account (non-retirement account) and put the money into SPY (basically the S&P500). You don't need to know much about the market to do that. Obviously there is some risk but on average it's probably the best gain you're gonna make and all the gains become tax free if you hold onto it for more than a year and you are under the 36k taxable income.

Re: IRA vs CD - which is right for me?

Revelate — Wed, 26 Mar 2014 20:45:15 GMT

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.

Re: IRA vs CD - which is right for me?

mongstradamus — Wed, 26 Mar 2014 20:55:49 GMT

@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.

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.

Re: IRA vs CD - which is right for me?

Revelate — Wed, 26 Mar 2014 21:10:44 GMT

@mongstradamus wrote:
@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.
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.

You don't pay taxes on your contribution, you do pay taxes on your earnings in this case, and there's still the 10% IRS penalty fee if you're not using it for a qualified purpose from what little research I did a few years ago. This contrasts to the traditional IRA / /401k where you pay at your standard tax rate for all contributions and earnings plus a 10% fee on top of that.

I didn't really look into it beyond that as pulling from any tax-advantaged retirement plan in my case would be an absolute last resort: namely, I'm going to lose my house (if I owned one) otherwise. With how difficult it is to get money into the plan comparitively, and the opportunity cost associated with the lost compounding interest, I'd sacrifice most other assets in my life before that. That said my burn rate is trivial compared to most people apparently and it is a YMMV situation.

Re: IRA vs CD - which is right for me?

compassion101 — Wed, 26 Mar 2014 23:48:02 GMT

I agree SPY is not a guarantee and not for everyone, but it's all about risk tolerance. Even for 2 years if it were me I would put it inSPY as opposed to a cd knowing that if things went well I could either get the house earlier than expected or afford more of a downpayment, and that if things went bad I would have to save somewhat longer than expected. If it was money I needed 2 years from now to either live or die then I would just put it in a savings account and take virutally no risk.

Just some numbers so OP can have a better understanding of the risk/reward outlook, looking at the 2 year returns of the S&P since 1975 (as far back as I ran data). Keep in mind this is not a large enough sample size to guarantee that the results over the next 2 years will fall into this range. However, the S&P has been up 32 of the 2 year periods and averaged a return of 28% over those 2 years. I has also been down in 6 of those 2 year periods and the average return over those 2 years is -21%. SPY also has an annual dividend yield of around 2% which increases returns and lessens the losses. So based on those figures:

$10,000 invested today in the S&P on average will be worth $13,200 in 2 years 84% of the time, and worth $8,300 16% of the time. The most that 10k has been worth over the data sample is $17,000 (1997/1998) and the least is $6,800 (2007/2008). Meanwhile a cd of $10,000 will be worth about $10,200 nearly 100% of the time atm. Of course cd rates will likely go up over the next couple of years but probably not much and only if you wait to invest in the higher rate.

Just consider your situation and find an option best suited to your needs.

Re: IRA vs CD - which is right for me?

Justin93 — Sun, 30 Mar 2014 13:48:17 GMT

#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.

Re: IRA vs CD - which is right for me?

Jazzzy — Mon, 31 Mar 2014 22:49:18 GMT

@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.

Re: IRA vs CD - which is right for me?

bobebob — Mon, 07 Apr 2014 23:02:24 GMT

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

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.

@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.

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.

@Jazzzy wrote:
@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.

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.

@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

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.

Re: IRA vs CD - which is right for me?

Jazzzy — Sun, 06 Apr 2014 15:09:29 GMT

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.

Re: IRA vs CD - which is right for me?

bobebob — Mon, 07 Apr 2014 23:19:39 GMT

@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.

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.

Re: IRA vs CD - which is right for me?

Anonymous — Wed, 16 Apr 2014 04:35:25 GMT

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

Re: IRA vs CD - which is right for me?

compassion101 — Wed, 16 Apr 2014 06:57:38 GMT

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

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).

Re: IRA vs CD - which is right for me?

compassion101 — Wed, 16 Apr 2014 07:02:57 GMT

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.

Re: IRA vs CD - which is right for me?

coterotie — Wed, 16 Apr 2014 20:31:23 GMT

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.

@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.

Re: IRA vs CD - which is right for me?

Jazzzy — Wed, 16 Apr 2014 22:22:43 GMT

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.