Investors are advised to have a mix of investment instruments in their portfolios to help mitigate the chances of huge financial losses. One such tool many investors choose are traditional CDs as they are safe, backed by FDIC insurance against bank failures, are short term, low-risk, and provide a guaranteed rate of return. Many investors working towards their retirement goals may opt for fixed rate IRA CDs as a way to add to the mix. However, using solely IRA CDs as your retirement strategy will ultimately limit the amount of money you have available for that long term goal.
IRA CDs will guarantee a rate of return, though the rate earned is typically lower than the money that can be made off of other higher risk investments. The exchange for ensuring your principal will remain intact and for the guarantee of earning some money is earning a low interest rate over the period of the investment.
The rates will also be lower for IRA CDs because of the type of investments that feed them. Common Securities are the investment instruments that compose most IRA CDs. Again, they are extremely safe but do not have the earning potential associated with higher risk investments such as stocks or mutual funds.
Like with any CD, once invested in an IRA CD your money will be tied up until the maturity date of the IRA CD. While the money is tied up financial professionals use that money that you’ve invested and reinvest where ever they see fit. With the gains of the reinvestment, banks will then pay you the gains on the interest once the IRA CD matures.
If you are a conservative investor, an IRA CD is a way to ensure you will have some money when you retire. However, as with all investment strategies, an IRA CD should not be your only investment plan. Also look into mutual funds, money market accounts, savings bonds, and corporate bonds.