Should I Move My CD Into an IRA?

For young workers that don't have a 401(k) plan at work, a traditional IRA or a Roth IRA may be a better choice than a CD ladder when investing for the long term.
By Richard Barrington
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I'm 29 years old with a family, and I own my home. I have a savings account with a good amount of money in it, but the interest is rather negligible. My current job does not offer any type of 401(k) and I was looking for an alternative.

I want a long-term approach that I can contribute to regularly. I considered laddered CDs, but the rates are sub-par and I don't want to worry about paying taxes on the interest. Perhaps IRA CDs would be a better choice, but I don't know a lot about them. Thank you for your time. Any advice would be appreciated!

A. While average CD rates are admittedly uninspiring, the latest America's Best Rates survey shows that the highest CD rates -- which are about twice as high as average rates -- can be found by shopping around. However, the circumstances you describe suggest there may be other decisions to make beyond which certificate of deposit to choose.

Your thought about setting up an IRA makes perfect sense since your employer doesn't offer a retirement plan. Still, that raises the question of whether you should opt for a traditional or a Roth IRA. Once you tackle that matter, you can consider how best to invest your IRA -- and it may well be that a long-term-investment approach is more appropriate for you than a CD ladder even with the best IRA CD rates.

How to decide on a traditional vs. Roth IRA

The decision between a traditional IRA and a Roth IRA centers around how you want to handle the tax liability for your investment. Traditional IRAs allow you to defer taxes on contributions until you start to take money out of the IRA in retirement. With a Roth IRA, you don't get a tax deduction for your contributions -- but then you also don't have to pay taxes on the distributions you take from the plan in retirement.

Essentially, the decision comes down to a question of whether you want to pay taxes now (with a Roth IRA) or later (with a traditional IRA).

One way to think about this is to consider whether you are in a fairly high tax bracket now or whether you expect to be in a higher tax bracket when you retire. You can choose between a Roth and a traditional IRA based on whether you think you are better off paying taxes now or in retirement.

Note that, while an IRA has tax benefits, you shouldn't necessarily put all your savings into one. There is a tax penalty if you take money out before age 59 1/2. So particularly because you are a homeowner, you should hold some savings back in an emergency fund just in case.

Thinking of starting your emergency fund? Read Opening Multiple Money Market Accounts is a Smart Move

Investing your IRA

Since you are 29 and IRAs are designed for you to leave money in them until you reach age 59 1/2, you should think about investing your IRA money for the long term. This may mean thinking beyond the one- to five-year maturity dates you'd typically get from a CD ladder.

Most experts would suggest that investing with a 30-year time frame in mind should involve some component of stock investment. Growth investments like stocks carry the risk of price fluctuations and even permanent losses, but they can also earn returns that help keep your retirement savings ahead of inflation through the years.

If you don't feel ready to select individual stocks, there are plenty of stock mutual funds that can give you broad diversification without having to buy several individual stocks. There are also target-date funds and other multi-asset class funds that handle the asset allocation of your investments for you. (Asset allocation is the decision of how to divide your investments among stocks, bonds and other asset classes.)

Since you are under 30 and already own a home, it sounds like your finances are off to a good start. The next step is to begin saving and investing for the long term via a retirement fund.

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