CD's in an IRA?

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cupiehead
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CD's in an IRA?

Post by cupiehead »

an acquaintance told me he has only CD's in his IRA...I thought it was strange...any comments on this strategy? seems kinda pointless to me
muddlehead
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Post by muddlehead »

it is, unless he's only years away from retirement. or, he can't stomach stock market risk.
chaz
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Post by chaz »

Better than just money market funds.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
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DaveTH
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Post by DaveTH »

I thought it was strange...any comments on this strategy? seems kinda pointless to me
Why do you consider the strategy strange and pointless? Holding CDs in an IRA isn't really any different than holding bonds.
guest42
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Post by guest42 »

I hold CD's in my IRA. I hate the flucuating NAV of a bond fund. I am in retirement.

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moneyman11
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Post by moneyman11 »

It's funny the way CDs get no love as an investment.

Even around here, when people talk about short term nominal investments, rarely are CDs mentioned as an option.

For folks with less than 100K to invest (or more now that FDIC limits are going up), I think CDs are a wonderful place for short term nominal investments - paying much higher yields, but with essentially the same zero credit risk as treasuries.

Especially for tax deferred accounts where you have access to a CD marketplace, like Schwab, where you can keep all your CD investments under one roof, and spread the 100K per CD around among different banks to maintain FDIC insurance.
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cupiehead
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Post by cupiehead »

I guess personally I would just rather buy bonds within an IRA. I could understand if you're in retirement possibly and are very risk averse, but this guy is 32, and the way he mentioned it to me was like it was a brilliant strategy, when my first reaction was to furrow my brow in confusion
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dm200
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Just fine for the risk averse ..

Post by dm200 »

IF you wanted to have CDs in an IRA, I suggest opening the acct with a large, full service credit union with federal insurance.

Find one that pays high rates dependably, especially on longer terms (5-7 years).
moneyman11
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Post by moneyman11 »

cupiehead wrote:I guess personally I would just rather buy bonds within an IRA. I could understand if you're in retirement possibly and are very risk averse, but this guy is 32, and the way he mentioned it to me was like it was a brilliant strategy, when my first reaction was to furrow my brow in confusion
We don't know anything about his investing objectives, but ...

If you were going to invest 100K in a short term (1yr) nominal fixed income instrument that you were going to hold to maturity in a tax deferred account, would you want a US Treasury Note currently yielding 1.30%, or a one year FDIC insured CD currently yielding 3.70%.

Which one of those choices would furrow your brow more? :)
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dm200
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These are rates for 5 year

Post by dm200 »

federally insured share certificates at several large credit unions:

Pentagon Federal Credit Union: 5.00% Annual Percentage Yield

Navy Federal Credit Union: 5.10% Annual Percentage Yield ($20,000)

Guaranteed, no loss of principal, federally insured to total of $250,000 per institution.
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DaveTH
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Post by DaveTH »

I guess personally I would just rather buy bonds within an IRA.
What type of bonds are you buying that would be paying higher yields than CDs? Also, why take on the default risk of individual corporate bonds?
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dm200
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Difference between

Post by dm200 »

perception and reality (pure economics) might be at play here.

Take a 6% RATE CD for a term of 7 years that pays out the interest annually at the end of each year. Say you buy one at $10,000.00 You get $600.00 every year (not compounded). At the end of 7 years you get the $10,000 back. The "perception" is that the "value" of the CD stays at a constant $10,000 over the whole time; that is what your bank or credit union statement says.

Compare a 6% rate BOND for a term of 7 years that pays out annually at the end of each year, and you buy one at $10,000. You get $600 each year and at the end of 7 years you get the $10,000 back. BUT - as interest rates rise and fall the market value of the BOND goes up and down, reflecting economic reality. You "perceive" gain and loss of value (which is actually the case)

BUT, the CD actually (in economic terms) gains and loses as rates fall and rise as well.
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