The reason to consider a Roth IRA Certificate of Deposit: Unless you’ve been living under a rock, you’re aware that the stock market has gone up and down wildly over the last few years. A snapshot:

  • 2007: S&P stays relatively even and gains 5.48% throughout the year
  • 2008: S&P 500 drops 36.55% from January 1 to December 31
  • 2009: S&P 500 recovers and goes up 25.94% from January 1 to December 31
  • 2010: S&P 500 goes up 14.82%
  • 2011: S&P 500 goes up 2.10%
  • 2012: S&P 500 goes up 15.89%
  • 2013: S&P 500 goes up 32.15%
  • 2014: S&P 500 goes up 13.52%
  • 2015: S&P 500 goes up 1.38%
  • 2016: S&P 500 goes up 11.74%

In recent years, the S&P has had a lot of ups and downs. Some points have been downright scary for those with a short time horizon for their investments who weren’t able to hold on until the market recovered. In the long run history shows that investing in stock index mutual funds is still the best way to have great returns, particularly if your portfolio uses solid asset allocation practices.

But if you’re about to be relying on the money in your portfolio for income because you’re near retirement, stocks are probably not where you want to be (or be a lot). And if you lived through what they’re now calling the Great Recession, you’ve likely seen your portfolio practically get cut in half—even if you also (we hope) saw it pretty much recover. That could well leave you a bit squeamish about relying on stocks to preserve big hunks of your retirement income. If that’s the case, consider a Roth IRA Certificate of Deposit (CD).

Roth IRA Certificates of Deposit

The certificate of deposit that you’re used to seeing at your local bank branch is now an investment option inside a Roth IRA. Always read the prospectus from your investment firm to verify the terms, but most CDs should come with FDIC insurance.

Benefits of Using CDs in Your Roth

There are two main benefits to using a certificate of deposit in your Roth IRA.

  • The first is you get a consistent return. The APY (annual percentage yield) given for the CD when you invest is the return you will receive for the duration of the CD.
  • The second benefit is almost a complete lack of risk associated with your investment. If your Roth IRA CD comes with FDIC insurance, you’re covered up to $250,000 if the institution goes under. You are locking in your return at a lower rate, but not taking on any risk.

Downsides to Using Roth IRA CDs

There are three risks associated with using certificates of deposit in your Roth IRA.

  • First, while you are locking in your return for the length of the CD, you’re likely missing out on much higher returns elsewhere. The average one-year CD available nationwide is only paying out 0.72% (October 2018). The highest rates were around 2.55%. Meanwhile, you could earn a much higher return with stock and bond mutual funds.
  • The second risk ties in with the first. Since you are accepting a really low rate of return, you open yourself to the risk of inflation. If you put $100,000 in a CD today earning 1%, and inflation is 3%, when you get the money out of the CD it will be worth less than when you put in. Inflation will be slowly eating away at your investment principal.
  • The third risk is only a risk if you’re not paying attention when you open up the CD in your Roth IRA. It’s the risk of not having FDIC coverage on your CD. You’re already accepting a low rate of return. Don’t increase potential damage by not having insurance on your deposit. Can you imagine losing a large chunk of your Roth IRA if your financial institution went under?

Verdict: Using Certificates of Deposit can be a good way to balance out a portion of your investment portfolio to maintain lower volatility during market fluctuations. If you are at or near your retirement age, you may consider using CD Ladders within your Roth IRA to help manage your cash flow and ensure a decent return on investment.

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