We're excited to share that we were recently featured in a Forbes article! The Pros And Cons Of IRA CDs, was written by Kate Ashford and discusses exactly that, the pros and cons of utilizing certificates of deposit within an Individual Retirement Account (IRA). Our President, Mychal Eagleson, was featured in the article and shared his thoughts on the cons of utilizing CDs within IRAs including their historically low returns and how for most investors, they'd probably be better off seeking choices that can yield a higher compounded return over the long-term. A big thank you to Kate for including us in this piece!
"When you think of IRA investments, you probably picture stocks, bonds and mutual funds. But there are a variety of things you can hold in an IRA—and certificates of deposit (CDs) are one of them.
When you deposit money in a CD, you agree to keep it there for a set term (six months to five years, typically) in exchange for a guaranteed rate of interest. IRA CDs are one way to diversify your retirement portfolio, by putting some of your money in a low-risk account.
But should you? Financial experts aren’t entirely enthusiastic. Here’s the scoop:
PROS of an IRA CD
They’re a safe place to put your money. In return for locking your money up for a specified period, you get a guaranteed return on your funds. Today, CDs are yielding higher rates than they used to—2.5% or more for a 12-month term. At an FDIC-insured bank, deposit accounts within an IRA are insured for up to $250,000, unlike stocks or bonds. “We’re holding CDs in lieu of bond funds in clients’ IRAs, especially those who are older than 59 ½ who want security for at least a portion of their portfolios with basically no fee,” says Dennis Nolte, a financial planner in Oviedo, FL.
They can help with short-term income needs. If you’re near retirement or currently retired, you’ll be using (or anticipating using) part of your portfolio for income. “The good thing about using CDs in an IRA is the ability to create a ladder for predictable income in the short term,” says Kristin Sullivan, a financial planner in Denver, CO. “However, most IRA money should still be positioned for longer term growth.”
CONS of an IRA CD
It’s a low return. “No matter the environment, interest rates on CDs are always only a small percentage higher than the prevailing rate of inflation,” says Mychal Eagleson, a financial planner in Indianapolis, IN. “So, in terms of real returns—return minus inflation—their yield is always relatively low.”
They take up valuable IRA space. If you’re under age 50, your annual IRA contributions are currently capped at just $6,000—and only $7,000 if you’re 50 or older. “Using up that limit contributing to a low return investment like an IRA CD detracts from the dollars that can be invested in stocks and even bonds, which over the long term have provided higher real returns,” Eagleson says. “For what the average investor can contribute to retirement savings, they need the higher compound returns in their retirement accounts that come from long-term investments.”
They may be too conservative for you. If you’re years from quitting work, putting your IRA money in CDs isn’t going to get you enough bang for your retirement buck. “It’s best to get as much growth as possible in an IRA,” says Artie Green, a financial planner in Los Altos, CA. “If the IRA owner is young, it makes the most sense to invest in higher-yielding assets.”
You’re locked in. That guaranteed return comes at a price—you generally can’t access your money before the CD term is up without paying a steep penalty. And if interest rates go up in the meantime, you’re still locked into your initial rate. “I would not want to buy a five-year CD right now and lock in a rate when interest rates are likely going to be rising over the next five years,” says Edward Snyder, a financial planner in Carmel, IN.
There are more flexible options. “The only possible use of an IRA CD would be for money you know you will need to withdraw in the next 12 to 24 months,” says Chris Baker, a financial planner in Carmel, IN. “But that same objective can be obtained by utilizing short term bonds, and you don’t have the restrictions of a CD with a three, six or 12-month term.”
This article was written by Kate Ashford and originally published by Forbes here.
Are you trying to figure out the best way to invest in your IRA or if CDs are really a good fit given your situation? Don't hesitate to reach out to us. We help our clients with planning that provides practical answers to questions like this and much more.