CDs: The Safest Investments
Your certificates of deposit are insured up to USD 250,000, if you open them at banks that are member firms of FDIC (Federal Deposit Insurance Corporation).When one thinks of investing for the future, there are many options to choose from. They range from the very high-risk alternatives like stocks, dependent on volatile market conditions, to some investments like IRA certificates of deposit, which are counted among the safest. Those who are looking for investments with the lowest degree of risk, with guaranteed returns, as part of retirement planning, should seriously consider them.
Before opting for them, it's essential that you research through all the available options. It is necessary that one knows the best rates on offer, because they inherently come with low yield.
The yield that can be had from any investment is directly proportional to the amount of risk involved. Low risk automatically translates into low interest rates and that is why, one needs to look out for the highest rates on offer, to get maximum benefit.
A Brief Introduction to IRA CDs
Contrary to popular belief, an individual retirement account (IRA) is not an investment scheme. It is a savings account with tax breaks, in which, you can store your investments, including mutual fund investments, stocks, and certificates of deposit.
There are many types of these accounts, that have varying features with respect to tax deduction during deposition and withdrawal. Contributions to a traditional IRA may be tax deductible, depending on your income, but the interest will be taxable during withdrawal. In a Roth IRA, the initial contributions are not tax-deductible but your money grows tax-free and no taxes are levied on the interest, during withdrawal.
Though the money in this account cannot be withdrawn until retirement age limit, it can be invested. A certificate of deposit is a popular choice, when it comes to investing IRA money. It is a deposit that guarantees fixed returns after a stipulated period of time. The amount of returns is decided by the APY (annual percentage yield) or compounded interest rate. The higher the APY offered, higher are the profits from investing in an IRA. Naturally, longer the period of investment, higher will be the returns on it. The money invested in this certificate of deposit, is insured by the FDIC (Federal Deposit Insurance Corporation). In wake of the economic recession, these investments are much sought after today, as most other conventional investments are riddled with high degrees of risk.
There are two ways in which you may open an IRA CD. Either you go through a brokerage firm that invests for you in a CD, without openings of an account with a bank, or you go through a bank. Your CD contribution will be your IRA contribution for the year. Look at your contribution limit for the financial year and plan the deposit amount accordingly, as it is going to limit your future investments in the year, from the account. For 2014, the IRA contribution limit is USD 5,500 and USD 6,500, if you are above 50 years of age.
Highest Rates Offered
The rates are usually not fixed and are subject to change, depending on market conditions. The APY is naturally quite high for long-term deposits, compared to short-term ones. Here is a small chart showing the current highest rates offered by banking institutions, in the United States of America. The rates are subject to change and for the latest data, it is best to check out with banks. Here are the highest rates offered for different investment terms. All rates specified here, are as on May 7, 2014 and are compounded daily unless specified otherwise.
|Discover Bank||0.65%||0.65%||USD 2500|
|TAB Bank||0.40%||0.40%||USD 1000|
|American Bank||0.15%||0.15%||USD 500|
|California First National Bank||1.00%||1.00%||USD 5000|
|Discover Bank||0.95%||0.95%||USD 2500|
|First Internet Bank of Indiana||0.85%||0.85%||USD 1000|
|AloStar Bank of Commerce||0.80%||0.80 %||USD 1000|
|TAB Bank||0.65%||0.65%||USD 1000|
|Salem Five||1.25%||1.24 %
|California First National Bank||1.20%||1.19 %
|Discover Bank||1.05%||1.04 %||USD 2500|
|TAB Bank||1.01%||1.00%||USD 1000|
|AloStar Bank of Commerce||1.00%||0.99%||USD 1000|
|Discover Bank||1.10%||1.09 %||USD 2500|
|CIT Bank||1.27%||1.26%||USD 1000|
|California First National Bank||1.30%||1.29 %
|Discover Bank||1.25%||1.24%||USD 2500|
|AloStar Bank of Commerce||1.15%||1.14%||USD 1000|
|CIT Bank||1.70%||1.69 %||USD 1000|
|Discover Bank||1.60%||1.59 %||USD 2500|
|TAB Bank||1.31%||1.30%||USD 1000|
|First Internet Bank of Indiana||1.30%||1.29%
|CIT Bank||2.25%||2.23%||USD 1000|
|Salem Five||2.00%||1.98%||USD 2000|
|Discover Bank||1.95%||1.93%||USD 2500|
|First Internet Bank of Indiana||1.65%||1.64%||USD 1000|
|Jumbo IRA CD|
|1||California First National Bank||1%||1%
|2||California First National Bank||1.20%||1.19%
|2.5||Discover Bank||1.10%||1.09%||USD 100,000|
|3||CIT Bank||1.40%||1.39%||USD 100,000|
|4||CIT Bank||1.80%||1.78%||USD 100,000|
|5||CIT Bank||2.30%||2.27%||USD 100,000|
The returns from these types of time deposits can be maximized by building CD ladders, that help you take advantage of long and short term interest rates. Here's how it works. Suppose you have USD 9000 to invest. To create the ladder, you invest USD 3000 each in 1-year, 2-year, and 3-year deposits. At the end of each 1 year period, as the short term deposit matures, reinvest the money in another 3 year deposit or one with the longest term. With respect to our examples, after a year, as the first CD matures, reinvest the maturity amount as a 3-year CD and keep doing this every year, to reap benefits of long and short term interest rates.
IRA CD constitutes one of the safest investments ever, but the promised returns are lower compared to other investments like mutual funds, stocks, and bonds. Moreover, the yields on these investments may not be high enough to combat inflation. It is advisable that you put your money into diverse investments, with a gradation in terms of the risks involved. Evaluate your risk appetite and get advice from a financial planner if need be, to make the most of your investments.