Yesterday I asked Herbert Hopwood, CFP and president of Hopwood Financial Services in Great Falls, Va. why investors would buy CDs in an IRA.
It's kind of a silly question but, luckily, Hopwood believes there are no dumb questions, only dumb answers. So he gave me a smart answer.
"We consider them like a bond. When we're managing a client portfolio we put them in the bond category and produce a maturity schedule that includes fixed income instruments which include CDs. So, we're agnostic as to whether it’s a Treasury or a corporate or a CD or a muni," Hopwood says.
Further, for people putting together their own portfolios, he believes that CDs are often a better choice because they're more understandable than bonds. Which is true, CDs are a very straightforward investment, in most cases you know what you're getting and can just relax until the CD matures.
"An example, a client came in a couple of years ago and said they had bought a really great bond and it was Ford Motor Credit. And he said, it was just like a CD, but no. Luckily, Ford didn't go into bankruptcy but GM and Chrysler did and if you owned those bonds you got hit pretty hard so you need to know what you're buying and how to buy it," says Hopwood.
There's another benefit to IRA CDs. According to this Bankrate story written by Dr. Don Taylor, "many IRA CD accounts allow you to liquidate an amount equal to the required minimum distribution each year without the early withdrawal penalty."
Obviously, that's only a benefit to investors over 70½ with a traditional IRA.
Are there other benefits to IRA CDs? Do you use CDs as a bond substitute in your retirement accounts?
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