When it comes to savings, there are many options to choose from. Two of the most popular are IRAs and CDs. Though they have some similarities, there are also some key differences that you should be aware of before making a decision. In this post, we’ll take a closer look at each one and help you decide which might be right for you.
What is IRA?
IRA stands for Individual Retirement Account. IRA is one of the most common retirement savings accounts in the US. Anyone with earned income can open and contribute to an IRA. The contribution limit for 2020 is $6,000 ($7,000 if you’re age 50 or older). The IRA contribution deadline is April 15th of the year following the year for which you want to make the contribution. For example, if you want to make a contribution for 2020, the deadline would be April 15th, 2021. IRA contributions are made with after-tax dollars, which means that you’ve already paid taxes on the money you contribute. IRA withdrawals are taxed as ordinary income. There are two main types of IRA: traditional IRA and Roth IRA. In a traditional IRA, your contributions are tax-deductible and your withdrawals are taxed as ordinary income. In a Roth IRA, your contributions are not tax-deductible, but your withdrawals are tax-free.
What is CD?
CD stands for Certificate of Deposit. It’s a type of savings account that usually has a higher interest rate than a regular savings account. The trade-off is that you can’t access your money for a set period of time, which is typically between six months and five years. CD rates are generally determined by the Federal Reserve’s target interest rate, plus or minus a margin. For example, if the Fed’s target rate is 2%, and the bank’s CD is offered at 3%, that means the CD has a 1% margin. CD terms and rates can vary considerably from bank to bank, so it’s important to shop around before you choose one. CDs are FDIC insured, just like savings accounts, so you don’t have to worry about losing your money if the bank fails. However, if you need to access your money before the CD matures, you will typically have to pay a penalty. For that reason, CDs are best suited for people who don’t anticipate needing to use their savings in the near future.
Difference between IRA and CD
IRA and CD are both financial products that offer benefits to investors. IRA is an Individual Retirement Account while CD is a Certificate of Deposit. Both IRA and CD have tax benefits and offer the potential for growth, but there are some key differences between the two. IRA contributions can be deducted from taxes, while CD earnings are taxed. IRA withdrawals are taxed, while CD withdrawals are not. IRA funds can be invested in stocks, bonds, and mutual funds, while CD funds must be invested in deposits with a financial institution. For these reasons, IRA and CDs are two different products that offer different benefits to investors.
Conclusion
The main difference between an IRA and a CD is that an IRA offers more investment options. With a CD, you are limited to the bank’s offerings, but with an IRA you can choose from a wider variety of investments. Another key difference is that with a CD, your money is locked in for the duration of the term, while with an IRA you can withdraw your money at any time (although there may be penalties for doing so). Finally, when it comes to taxes, CDs are taxed as regular income, whereas IRAs are taxed as capital gains.
