Fixed Rate IRA CDs
Fixed Rate IRA CDs are CDs that are held within an Individual Retirement Account (IRA) or a Roth Retirement Account. In an IRA, the funds are deposited pre-tax and allowed to accumulate tax free. When the individual retires, they are withdrawn and all earnings are taxed at the prevailing tax rate. Because individuals generally have lower incomes upon retirement, the tax rate is lower than what it would have been during their working years.
With a Roth IRA, post-tax funds are deposited into the account and the money is allowed to accumulate and be withdrawn tax free.
If the funds are withdrawn before retirement age 59 1/2, the individual will be required to pay a 10% penalty on top of any taxes owed. There are some exceptions to this rule. Fund can be withdrawn penalty free if they are used to pay for education at an IRA qualifying institution or in the purchase of a house.
Advantages to a FIRA
- Money grows in a tax-advantaged way.
- Funds are FDIC insured, just like a regular CD.
- Interest rates on FIRAs are often higher than the same terms for a CD.
- Some flexibility in withdrawing the money early for first time homebuyers and education expenses.
Disadvantages to a FIRA
- Returns may not be as high as stocks, bonds, mutual funds.
- Funds cannot be withdrawn until 59 1/2 without penalty (except for IRS approved expenses).
- If interest rates rise during the term of the FIRA, money will be stuck in lower yielding account.