People Are Flocking to IRAs and CDs, But Only 1 Will Make You Richer, Says Ramit Sethi
Written by
Terence Loose
Edited by
Zuri Anderson
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
At a 30,000-foot level, an individual retirement account (IRA) and a certificate of deposit (CD) might both seem like wise wealth-building financial instruments since both are designed to grow your money.
But take a closer look it becomes obvious that each one serves very different purposes and has very different potential, according to Ramit Sethi, personal finance influencer, New York Times bestselling author and host of Netflix’s “How to Get Rich.”
First, an overview.
What Is an IRA?
This is an investment account with certain tax advantages that is designed to help you save for retirement. Within an IRA, you hold various investments, from cash to stocks and bonds, EFTs, mutual funds, and more, which grow over time.
There are limits on how much you can contribute and when you can access your money. There are also different types of IRAs, such as traditional and Roth IRAs, with different tax advantages and rules for withdrawal.
What Is a CD?
Think of a CD as a savings account, with a few distinctions. First, while a CD might offer a better interest rate, the best CDs as of Jun. 5 still only yield 4.6%. Second, unlike a normal savings account, with a CD you must agree not to touch your money for a certain amount of months or years. If you do, you pay a hefty penalty. Most CDs are FDIC insured up to $250,000, however.
So, Which Is Better To Build Wealth?
Hands down, according to Sethi, an IRA is the one to choose to build real wealth.
That’s because, while CDs are very safe, they struggle to earn enough to keep up with inflation. In fact, said Sethi, often, you’re going backward — losing money to inflation. So, said Sethi, “unless you’re allergic to risk, your money deserves better than a glorified piggy bank.”
IRAs, on the other hand, can power up your wealth. But it might take some time.
Sethi gives this example: If you invested $6,000 a year in an IRA starting at 25 years old, and earned a very achievable 7%, by age 65, you would have $1.4 million. That’s a nearly six-fold increase in your money. And since the average return of the S&P 500, a relatively safe investment option, is 10%, you could do even better.
The trick, and the most difficult part, is the discipline to put a decent chunk of your take home into savings in the first place. Nail that and you probably don’t even need Sethi’s advice on how to get rich.
More From GOBankingRates
