CDs - IRAs
What's the difference between a CD and an IRA?
A Certificate of Deposit (CD) is used for mostly short term investments. CDs require the individual to leave the money in the account for a specified period of time ranging from 3 months to 5 years in exchange for a specified rate of return. An Individual Retirement Account (IRA) is used for long term investment with the goal of growing the investment until retirement and not withdrawing until after retirement. IRAs also offer certain tax advantages.* The money in an IRA can be invested in a variety of financial instruments including CDs.
Liquidity is the term used to describe how easy it is to access your money. Neither a CD nor an IRA CD is very liquid. CDs cannot be redeemed before their maturity date without paying a penalty that usually amounts to three to six months of interest. IRA CDs are even less liquid because it is in a retirement account. Unless you have a specified hardship withdrawal, you cannot take money out of your IRA before you reach age 59-1/2 years old without paying additional penalties.
With a CD, you must pay taxes on any interest on the account in the year that you earn it, even if it has not been paid yet. For IRA CDs, the interest is either tax free or tax deferred depending on which type of IRA you have. If you have a Traditional IRA, the interest earnings are tax deferred until you withdraw the money at retirement. If you have a Roth IRA you can withdraw the money tax free.
There are no limits to the amount of money that you can put into a CD each year. However, there is a limit to how much money you can contribute annually to an IRA CD.
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*Pulaski Bank is not a tax advisor. Please contact your personal tax advisor before making any tax-related decisions.