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Both CDs and IRAs offer investors an easy way to save money. However, there are several differences between them, including how they can be used, terms, tax liabilities and benefits.
The Facts
IRAs, or Individual Retirement Accounts, are savings plans that offer a tax-deferred way to save money for retirement. A CD, or Certificate of Deposit, is an account that earns interest over a set amount of time (the "term").
Contributions
IRA contributions can be made annually, but there are limits based on income and age. With CDs, an initial investment is made and investors receive that plus interest at the end of the term.
Time Frame
CD terms are typically offered for up to 5 years. IRA investors are required to start withdrawing their money at the age of 70 ½.
Tax Liabilities
A 10 percent tax penalty is charged for early IRA withdrawals (before the age of 59 ½) and income taxes are due the year earnings are withdrawn. Individuals pay taxes annually on CD interest earned.
Risks
CD investments are low risk because funds are insured up to $250,000 by the Federal Deposit Insurance Corporation and interest rates are fixed. IRAs have higher risks, depending on the type of investment and the stock market conditions.
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