Author Topic: CD vs IRA  (Read 849 times)

Catica

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CD vs IRA
« on: January 26, 2019, 04:37:34 AM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?

MustacheAndaHalf

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Re: CD vs IRA
« Reply #1 on: January 26, 2019, 05:25:41 AM »
Assuming you're in the median 22% tax bracket, the CD would have an after-tax yield of 2.77%.  The stock market historically does much better than that, so I'd put money in the IRA.  Within the IRA, you can then buy a low expense ratio mutual fund or ETF.

Catica

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Re: CD vs IRA
« Reply #2 on: January 26, 2019, 06:26:25 AM »
Assuming you're in the median 22% tax bracket, the CD would have an after-tax yield of 2.77%.  The stock market historically does much better than that, so I'd put money in the IRA.  Within the IRA, you can then buy a low expense ratio mutual fund or ETF.
I'm in the 12% bracket.  I invest in VTSAX and VTIAX in my IRA.

nereo

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Re: CD vs IRA
« Reply #3 on: January 26, 2019, 10:26:13 AM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?

An IRA is just a 'bucket' where you can put different investments.  You can hold CDs within your IRA.

Why do you want to hold money in a CD now but transfer to a different asset later?

Catica

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Re: CD vs IRA
« Reply #4 on: January 26, 2019, 01:57:49 PM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?
Why do you want to hold money in a CD now but transfer to a different asset later?
Did I say that?  I want to put it either in CD (not IRA CD) or my IRA and invest it in VTSAX.  If I put it CD In 5 years I have access to that money and it earned 3.55% interest.  In IRA I don't have access to it in 5 years (sure I know of backdoor Roth IRA) and I can only contribute $6000.  If I put the money in CD now I won't contribute any $ to IRA until the end of the year or even later in 2020 for 2019.  If I contribute to IRA now, it's not guaranteed that I will get 3.55% interest rate on CD at the end of the year.  So, in a long run what's more beneficial in a the next 10 years, let's say?

nereo

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Re: CD vs IRA
« Reply #5 on: January 26, 2019, 02:26:42 PM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?
An IRA is just a 'bucket' where you can put different investments.  You can hold CDs within your IRA.

Why do you want to hold money in a CD now but transfer to a different asset later?
Did I say that?  I want to put it either in CD (not IRA CD) or my IRA and invest it in VTSAX.  If I put it CD In 5 years I have access to that money and it earned 3.55% interest.  In IRA I don't have access to it in 5 years (sure I know of backdoor Roth IRA) and I can only contribute $6000.  If I put the money in CD now I won't contribute any $ to IRA until the end of the year or even later in 2020 for 2019.  If I contribute to IRA now, it's not guaranteed that I will get 3.55% interest rate on CD at the end of the year.  So, in a long run what's more beneficial in a the next 10 years, let's say?

It's not clear to me whether you said that or not - I just want to make sure you are understanding things here.  You can invest in CDs within your IRA.  Or VTSAX.  Or REITs. Or foreign currencies.  Or Gold.  Or bonds. Or whatever.  And you can switch back and forth as you see fit.  So it's not an 'either/or' proposition.
You *can* contribute to your IRA now and be guaranteed to get that 3.55% interest rate.... by buying a CD!  As for not buying "an IRA CD" (which is a confusing term - one has an IRA *account* with various investments within that account) - if I understand you correctly the risk you run is not using the 2019 head space should you not contribute before 4/2020. With only rare exceptions you never want to miss the opportunity to max out your IRA each year. If you are wondering whether to buy in your taxable accounts now and save your tax-deferred (i.e. IRA) accounts until later, or vice versa the answer is almost always invest in your tax-deferred accounts first.

Asking what will work out better in the next 10 years no one can say for certain.  CDs are (by design) going to give you just a percent or so above what they expect inflation to be going forward.   The SP500 beats inflation over 10 year periods about 95% of the time, and with average returns of just under 8% after inflation. It's possible VTSAX not beat a CD with a 3.55% yield over 10 years, but not terribly likely.

Finally you've said nothing about your tax burden.  The reason to invest in an IRA is to defer taxes now and to have tax-free growth until you withdraw those funds in the future.  Depending on your income that can be very advantageous or only slightly advantageous.

NVDee

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Re: CD vs IRA
« Reply #6 on: January 26, 2019, 02:30:14 PM »
It all depends on when you need this money.  Or might need it.

Only you can answer that. 

radram

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Re: CD vs IRA
« Reply #7 on: January 26, 2019, 03:41:06 PM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?

Where are you able to get 3.55 on a 5 year CD? That is .5% higher than I can find, and is very close to exceeding my threshold for switching from short term to midterm CD's.

Post a link with the rate please.

I can not improve of Nero's response.

Another Reader

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Re: CD vs IRA
« Reply #8 on: January 26, 2019, 04:45:51 PM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?

Where are you able to get 3.55 on a 5 year CD? That is .5% higher than I can find, and is very close to exceeding my threshold for switching from short term to midterm CD's.

Post a link with the rate please.

I can not improve of Nero's response.

https://www.depositaccounts.com/cd/5-year-cd-rates.html

Longer term rates have declined recently, but there are still a couple of decent 5 year rates.

radram

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Re: CD vs IRA
« Reply #9 on: January 27, 2019, 11:38:14 PM »
I have enough money to contribute to my 2019 IRA now or I can put that in 5 year 3.55% CD and contribute to IRA at the end of the year.  I'm trying to figure out which would be the best option.  What would you guys do?

Where are you able to get 3.55 on a 5 year CD? That is .5% higher than I can find, and is very close to exceeding my threshold for switching from short term to midterm CD's.

Post a link with the rate please.

I can not improve of Nero's response.

https://www.depositaccounts.com/cd/5-year-cd-rates.html

Longer term rates have declined recently, but there are still a couple of decent 5 year rates.

I know what you mean.

About 2 weeks before the last rate hike  in December, I got a 1 year CD for 2.75%. Rates have come down to 2.45% for the same 1 year CD.

Thank you for the link. 3.63% is a pretty good 5 year rate.

nereo

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Re: CD vs IRA
« Reply #10 on: January 28, 2019, 05:27:29 AM »
It all depends on when you need this money.  Or might need it.

Only you can answer that.
Just so everyone understands, you *can* sell a CD before its maturity date, though you typically won't get the gains (though you might get some depending on tis age & market demand).

That means CDs aren't a horrible place to keep - say - an emergency fund, as you can access that money should you really need it, the principle is protected and since you miss out on gains selling early there's an incentive to not sell unless you really need to, unlike cash in the bank.

frugalnacho

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Re: CD vs IRA
« Reply #11 on: January 28, 2019, 09:51:46 AM »
I would contribute to my IRA and invest in VTSAX.  Then throughout the year I would invest extra cash into a brokerage account and buy VTSAX.