Jumbo CD Investments - CD Rates Blog

Difference Between IRA CD and CD

The biggest difference between an IRA CD and non-IRA CD is the tax consequences. IRAs (Individual Retirement Accounts) can contain a variety of investments, such as mutual funds, bonds, realestate, and of course CDs.

Without going into lots of detail about IRAs themselves, they basically are an investment account that grows tax free. You aren’t taxed until you take funds out. Traditional IRAs are made from pre-tax contributions and you can’t access those funds until you are 59 1/2 or older without paying penalties. There are some exceptions, but I don’t want to spend too much time on that. Roth IRA contributions are made after-tax. The account grows tax free, but you can also being to withdraw fund prior to 59 1/2 without penalty. If you wait until after 59 1/2 you aren’t taxed.

So back to the difference when it comes to CDs. An IRA CD won’t have any tax consequences until you begin to make withdrawals. With a non-IRA CD, you pay regular income taxes on the interest that is earned, regardless of whether you receive it.

For example, let’s say you open a $100,000 IRA CD for 3-years and a non-IRA CD at 5.00% APY. Over 3-years both CDs will grow to about $115,762.00. However, you will only have to pay taxes on the non-IRA CD. If you are over 59 1/2, at the end of 3-years you can take $5000 out and only owe taxes on that amount. The remaining funds can be left in the CD for another term. With the non-IRA CD you pay taxes on the full $15,762.00 (and generally you pay taxes when the interest is earned, so you would pay taxes on about $5250 per year).

An important note, IRAs have yearly contribution limits. You can’t just one day decide to create a $100,000 IRA CD. Those funds would have to have been accumulating over the years. SEP and SIMPLE IRAs (used by self-employeed and small business owners) have a fairly high yearly contribution limit. Traditional and Roth IRAs were $5000 for 2008.

View IRA CD Rates

cd :O)

Fed Cuts Rate by 50 Basis Points

The FOMC cut the Fed Funds rate today by 0.50% (50 Basis Points). That puts Fed Funds at 1.00%. This follows an earlier cut of the same in the beginning of October.

It will be interesting to see how this affects CD rates. The last cut mainly had an effect on the 90-Day and less CD Terms. 1-year and longer CD Rates remained the same. We expect a similar reaction.

The fact is many banks need the liquidity and competition will continue to keep the rates fairly high compared to Fed Funds. 1-year and longer rates may drop about .25%.

cd :O)

10-Day Give

I wanted to feature this in the newsletter, but I honestly don’t know when I’m going to be able to get that done. However, I still want to get the information out there.

In these scary times, sometimes it is helpful to take our eyes off ourselves, and look towards helping others. That is the premise of the 10-Day Give. It was started at a blog that I frequent.

Give it some thought and consider joining. We probably can’t directly affect the current crisis, but we can do small things that can have a ripple effect.

Go to it.

10-Day Give

cd :O)

Surprise Fed Cut of 0.50%

In an orchestrated move with other Central Banks, the FOMC lowered Fed Funds from 2.00% to 1.50%.

This will bring short-term rates down, but the longer-term may not be affected much. As a result, we will have the steepest yield curve we’ve had in some time.

I just don’t get it though. The Fed Funds rate isn’t the problem. The frozen credit market is the problem, and I don’t see how this is going to help that. Matter of fact, shortly after the Fed Cut the LIBOR rate went up a little. Many short-term lending instruments index to LIBOR in some fashion.

We are updating our rates as fast as we can. Hang in there.

cd :O)

New FDIC Insurance Limits

With a stroke of a pen, President Bush signed the Bail-out plan on Friday evening (10/3/08). A provision that was included was temporarily increasing the FDIC Insurance limit to $250,000. The increased limit is only in effect until 12/31/09. Congress would have to pass more legislation to make it permanent. The NCUA will follow suit so that federally insured credit unions will have the same coverage as the FDIC.

What this means for you: Any liquid accounts such as a checking, savings, or money market account at an FDIC insured bank or NCUA insured credit union are covered up to $250,000 until 12/31/09. Any CDs you have are also covered. You need to be careful with CDs though. If you invest in a new CD and it matures before or on 12/31/09, you will be covered up to $250,000 (assuming you have no other deposits). If it matures after 12/31/09, whatever amount is above $100,000 has the potential to be uninsured.

Personally I wouldn’t gamble that Congress will make the change permanent. I would only do CDs at the new maximum that mature before 12/31/09.

I will make a follow-up post regarding joint accounts and revocable trust accounts. It isn’t clear if the new limits apply to those or not. cd :O)