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Roth IRA CDs may dodge tax hikes

By Claes Bell ·
Monday, September 24, 2012
Posted: 6 pm ET

With the "fiscal cliff" looming, the future of income tax rates is a hot topic right now. Democrats and Republicans have differing opinions on how much income tax should be paid by whom, but most agree that current rates aren't sustainable at the present level of federal spending.

It's true that those saving for retirement can avoid paying today's relatively low tax rates on cash they save for retirement by putting it into an individual retirement account, or IRA, CD. As long as you don't expect to earn much in the way of returns, and especially if you have a specific retirement date in mind and want to have ready cash that's not subject to the whims of the markets, it's a decent option.

But if you're worried about tomorrow's rates, you may want to think about setting up a Roth IRA CD instead. Like other Roth IRAs, they allow you to put up to $5,000 (or $6,000 if you're over 50) worth of after-tax dollars into a retirement account that you can withdraw tax-free, along with any interest you've earned, after retirement. Sure, you won't get that tasty tax benefit now, but you'll be protected from higher rates in the future.

What do you think? Do you currently have any cash in IRA CDs? Are you worrying about paying taxes on the money you withdraw?

Follow me on Twitter: @ClaesBell.

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1 Comment
September 25, 2012 at 9:14 am

A Roth IRA is normally a long term investment, normally. Putting money in a CD long term is a losing proposition in terms of future purchasing power. While you may avoid taxation, your after inflation purchasing power will decline since bank cd rates are negative after inflation.