Definition of Three-Year IRA Certificate

An IRA is an Individual Retirement Account that provides tax advantages to save for your golden years. The government allows many types of IRA investments, including mutual funds and bank accounts. Many investors open a bank or credit union IRA as a type of savings account called a certificate of deposit, or CD. A three-year IRA CD means you agree to keep your retirement funds invested for that length of time.

Finding Your Type

The two major types of IRAs are traditional and Roth IRAs. You, or you and your spouse if filing jointly, must have taxable income to contribute to either type. For a traditional IRA, you can contribute only until age 70 1/2. If your income falls below a certain level, however, you can contribute to a Roth IRA at any age. The government also offers special-purpose plans, such as the Simplified Employee Pension IRA for small businesses and self-employed people.

Reaping Tax Benefits

The main benefits of an IRA account are the tax advantages. For a traditional or Roth IRA, your contributions grow tax-free in your CD or other account until you withdraw them. If you don't have a retirement plan at work, you can also deduct your contributions to regular IRA on your yearly income tax. If you or your spouse has a plan at work, your IRA deduction may be limited. In any case, contributions to a Roth IRA aren't deductible.

Searching for Certificates

CDs are usually offered through a bank or credit union, although you can also buy them through a broker. In a typical CD, you can't withdraw your funds without paying a penalty until the end of the term, such as three years. In exchange for tying up your funds, you receive a guaranteed rate of interest. If you buy IRA CDs from a bank covered by the Federal Deposit Insurance Corporation or a credit union belonging to the National Credit Union Administration, your retirement funds are insured up to $250,000 in any one institution.

Choosing Your Term

The length or time or term of a certificate of deposit typically varies between six months and five years, and interest rates are usually higher for longer-term CDs. For example, a three-year CD typically earns less than a five-year CD. In addition, some institutions offer higher rates for IRA CDs than for non-IRA CDs. When you open your three-year IRA CD, you'll commit to the term, investment amount and interest rate and sign bank and government-required paperwork.

Rolling to Retirement

One complication of a three-year IRA certificate is the short term. Unless you plan to retire in three years, you'll need to reinvest your certificate on a regular basis. If you don't do anything, most banks and credit unions automatically roll over CDs to the same term at the maturity date. However, this term may not have the best rate of interest. However, you usually have a grace period of seven to 10 days to reinvest your money without penalty. Contact the financial institution during this time if you want to choose your own term and rate.

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