CDs: an option for retirement investing?

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Certificates of deposit are often popular with retirement investors because of their guaranteed return and federally insured backstop. But the role of CDs in your retirement portfolio depends heavily on your time horizon and circumstances.

CDs are insured up to $250,000 by the Federal Deposit Insurance Corp., and they have a guaranteed, locked-in rate of return that delivers predictable yields to investors.

If you’re approaching retirement and looking to keep a portion of your retirement funds in an investment that doesn’t pose the risk of pushing back your retirement date because of unexpected volatility, CDs may fit the bill.

However, CDs expose investors to other types of risk, most notably inflation. Because CD rates generally rise more slowly than inflation rates and fall more quickly than inflation rates, CD returns can, over time, lag slightly behind inflation, eroding the real value of your savings.

For many retirees, retirement savings needs to outpace inflation by a significant margin to provide them a comfortable retirement for their full lifetime, says Herb Montgomery, Certified Financial Planner and president of The Montgomery Financial Group in Orleans, Mass.

That’s especially true for those with many years left before they retire, Montgomery says.

“You can’t get a decent enough rate of return,” he says. “Depending on your age, IRA money is for a time that could be way down the road.”

IRA CDs are CD accounts specifically designed for retirement investing. They reside in tax-advantaged retirement accounts such as individual retirement accounts and Roth IRAs, alongside other retirement holdings. When an IRA CD matures, investors are allowed to roll over the yield plus principal into a new IRA CD without paying taxes on those earnings.

As with other types of retirement investments, IRA CD investors may begin taking distributions at age 59½. Account holders who try to make withdrawals before age 59½ will pay a 10 percent penalty, plus any taxes owed unless the withdrawal is made for a specific purpose allowed under U.S. tax law.