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May 1, 2013
Retirement savers are usually focused on using stocks and bonds to build a diversified portfolio. However, when investors near retirement or want to take a more conservative approach to building their nest egg, low-risk investments like individual retirement account certificates of deposit may come into play.
IRA CDs are like regular CDs, which pay interest as long as the funds remain committed to the CD. An IRA CD differs in that it has additional tax advantages.
In a traditional IRA, contributions are tax-deductible, while withdrawals are subject to taxes. In a Roth IRA, contributions are made with post-tax dollars and withdrawals are tax-free.
In either case, your CD is protected by the Federal Deposit Insurance Corporation—insured up to $250,000 in principal. Stocks and bonds, meanwhile, can lead to hefty losses. However, the safety of IRA CDs doesn’t necessarily justify their presence in your retirement portfolio (at least not yet). Consider these factors: