Naive CD question in an IRA

Discussion in 'Finance, Investments, and Careers' started by Russ Smith, Jan 25, 2017.

  1. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    Was considering taking some of one of my IRA's that's currently in cash and buying CD's with that cash. Since I'm not going to be using the money anytime soon is this as obvious as I think where right now it's just cash earning nothing so if I buy a CD that earns 2.5%, I'm ahead by that much at the mature date of the CD?

    Next question, in the CD description under security features it says Federally Taxable? Yes. It's in an IRA I assume any interest earned is untaxed until a withdrawal is made is that correct?

    Looking in Fidelity's site you can get as high as 5.5% depending on maturity date. I'm tempted to do something that matures in say 2 years max in case I want to use that money to buy stocks or something but looking at this I'm getting the feeling I have to be missing something? If I can do a 5.5% CD with say a 5 year maturity, and I don't plan on needing that cash in 5 years, isn't this a no brainer if I don't want to be entirely in stocks? Under Coupon type it says FIXED so I'm assuming that means if I buy a CD that says 5.5% and matures in 2020, I'm going to get 5.5% on that CD until 2020 correct?

    I have a regular CD right now, very low % just a safety thing, it's about to mature and putting it somewhere else, but I've never had CD's in my IRA before so I'm trying to understand if they work the same and are as safe? I'm only 51 I know I'm not "supposed to" buy CD's in an IRA yet I'm just thinking since it's in cash right now, I ought to put some of it into a fixed CD and at least get something more out of it?
     
  2. AsUpRoDiGy

    AsUpRoDiGy Magnanimous

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    Money accrued in interest is subject to capital gains tax...which is obviously much lower than income tax. a 5.5% CD is hard to come by, but usually those are for longer maturity periods...and typically require higher minimum deposits. And yes...fixed rate means your rate will stay at 5.5% as it is not variable. Typical return on DOW is 6%, so a CD at that rate is a safe, and good investment.
     
  3. BillsCarnage

    BillsCarnage Registered

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    How much interest is your cash gaining compared to a CD? There's your answer.

    The only "draw back" to a CD is that you need to let it mature. As AsUpRoDiGy said you will be subject to capital gains since it is an investment.
     
  4. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    That's my question if it's in a IRA do I still get capital gains tax at the date it matures? Normally a CD you pay taxes on the interest accrued but you for example don't pay taxes on money in index funds, stocks etc in an IRA, that is until you withdraw the money and then you pay ordinary income tax on it.

    Right now the cash is essentially getting nothing .27% it says. The risk of a CD in an IRA is if interest rates go up you're locked in but it appears there's no downside risk, it's FDIC insured, about the only way you can lose money is withdrawing it early you get a CD penalty and then an early withdrawal from an IRA penalty but again this is money I have zero plans on using anytime soon.

    near as I can find I don't get taxed on it even after the mature date until I withdraw that money.
     
  5. AsUpRoDiGy

    AsUpRoDiGy Magnanimous

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    At 5.5%...I can't see it going much higher than that at a variable rate...if anything it would go lower. So a fixed rate at that percentage is worth it, by a long shot. If your CD is in an IRA, then you aren't subject to tax until the money is withdrawn...unless of course it's in an Roth IRA. However...with the money placed in an IRA it makes it tougher to withdraw the money, if you ever need it.
     
  6. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    Thanks yes I thnk that's the way it works. It's money I won't need anytime soon I'm quite sure of that.

    If I did need for some crazy reason money from an IRA I can always sell stocks and withdraw that money.

    Now the problem I have is after calling Fidelity they're saying I misunderstood what was on their site, the 5.5 thing the maturity date is on a 20 year CD, clearly not interested in that. So I guess I'm back to searching their site they have both new issue CD's and secondary CD's not sure what the difference is but for 4-5 years the rates are much lower but still better than the cash rate by a mile.
     
  7. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    upload_2017-1-27_12-50-24.png
     
  8. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    That is an example of one over 5, the maturity date says Oct 2018 but somehow they're saying that's not what it means. Not sure they understand it either
     
  9. AsUpRoDiGy

    AsUpRoDiGy Magnanimous

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    Was going to say...I would be surprised if a rate that high would apply to anything less than a 10 year maturity. If you're looking for a 5 year maturity...maybe check out some annuities. Rates are higher than CD's right now, and you can get them tax deferred as well.
     
  10. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    Yeah everyone I know tells me to stay away from annuities but from looking it appears all the rates near 5 are on the ones they're telling me have a much longer maturity date than I realized.

    Still might pull the trigger on a 5 year one paying 2.4, still beats .27
     
  11. AsUpRoDiGy

    AsUpRoDiGy Magnanimous

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    Annuities require a lot more research...certain firms will pay out at about .5%, and others will go as high as 6%, and you get annual pay-outs...depending on how you structure it. Still...they are typically more lucrative than CD's, but a little more complicated. Nonetheless, 2.4% on a 5 year maturity is actually a good deal. With the market so high right now...bonds, CD's, money market accounts, and annuities are all high on returns...so great time to safely invest and get a decent return.
     
  12. Folster

    Folster The system doesn't work.

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    Russ,

    It sounds like you are looking at brokerage CDs. They provide more liquidity than your traditional bank CD that hits you with a penalty for breaking the CD early. Your broker will list the market price on your CD daily. It could be trading at a premium or a discount depending on how interest rates have moved since you purchased the CD. As long as you hold it to maturity, you'll get the full value. If you buy a CD with a 2 year maturity, you'll be able to sell it at any time; however, it could be selling a discount.

    I'm not sure how old you are, but if you are less than 50, I suggest you stop trying to time the market. There's no reason to be putting tax deferred funds into low rate CD's unless you are planning to use the money in the next couple years.

    Studies show us time and time again, that those that try to time the market usually significantly under perform those who stay at a consistent risk tolerance and asset allocation.

    As long as you have sufficient time before retirement, stick your money in a couple of index funds in line with your risk tolerance and let them do their thing.

    Don't mess with annuities, especially inside and IRA. Sure you get a guarantee, but you have to pay for it.
     
    AsUpRoDiGy and jf-08 like this.
  13. Russ Smith

    Russ Smith The Original Whizzinator Contributor

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    Thanks for the feedback I ended up buying a Mutual fund with about 25K of the money.
     
  14. AsUpRoDiGy

    AsUpRoDiGy Magnanimous

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    Great choice!
     
  15. Yuma

    Yuma Back in NV!

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    Yeah, I am thinking this stock market is over-heated right now. Unless Trump tears apart every tax, and anti-business legislation ever, I am thinking we are due for a market correction sooner than later. Plus you are buying stocks high right now. I'd rather get them after a correction. Just talking strategy. :)
     

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