April 8, 2016
Whether retirement feels like a lifetime away, or the new life chapter is quickly approaching, the effort you put in now to financially prepare for the future can make all the difference. Saving is essential, and creating a sound investment strategy now can generate dividends in your retirement years.
So how do you put your money to work for you? Certificates of Deposit and Individual Retirement Accounts are two common investment options that you have likely heard of, but are you familiar with their function and purpose? Let’s cover the basics.
Certificates of Deposit, which are commonly referred to as CDs, are deposit accounts that generally offer a higher rate of interest than regular savings accounts, yet offer the same security. With a CD, a set amount of money is invested for a set term, and interest is credited at periodic intervals, such as monthly, quarterly or semiannually. At the end of the CD term, called the maturity date, the original investment is returned to the depositor with any accrued interest.Penalty fees are incurred if funds are withdrawn from the CD before the maturity date.
The flexibility of term lengths is a major benefit of CDs, offering investors time-frame options that suit their goals and lifestyle. Plus, investing in a CD at an FDIC insured financial institution ensures your money is protected. Conversely, a downfall of CDs is that inflation can affect the value of your investment. Though the value of a CD is guaranteed to increase over time, the rate of inflation can outpace the CD rate.
There are several types of Individual Retirement Accounts (IRAs), but the two most popular are the Traditional IRA and the Roth IRA. Deposits to IRAs can be made at regular intervals or in lump sums. Keep in mind that regardless of the IRA you choose, the Federal Government imposes annual contribution limits.
Traditional IRAs are used to build tax-deferred savings for retirement and are available without any income restrictions. Contributions made to a Traditional IRA may be tax deductible and any taxes on the earnings are deferred until it comes time to make withdrawals. Withdrawals are also known as distributions. You are required to start taking distributions by the age of 70 ½, and there are penalties for funds withdrawn before the age of 59 ½. However, funds can be accessed without penalty, but still taxed, if you are buying your first home, facing extraordinary medical costs or have become disabled. Generally, at Traditional IRA is best if you anticipate being in a lower tax bracket upon your retirement.
A Roth IRA is a retirement account where you make contributions with money on which you’ve already been taxed. In other words, with a Roth IRA, contributions are made on an after-tax basis and are not tax deductible. Contributions can be withdrawn tax- and penalty-free anytime. After you reach age 59 ½, you’ll pay no taxes on any earnings withdrawn. Contributions to a Roth IRA can be made at any age, provided you are still working. If you anticipate your tax bracket will not be lower at retirement, a Roth IRA may be a good option to consider.
Whether retirement is around the corner or an event in the distant future, now is the time to start nurturing your nest egg. CDs and IRAs are just two tools in an arsenal of financial resources available at your disposal. The best advice is to seek out professional guidance as you develop a strategy that will suit your goals and lifestyle today, and into your retirement years.