Best IRA Rates
Best IRA Rates for Certificates of Deposit
A certificate of deposit (CD) is one of the safest financial instruments to purchase as part of an IRA. While a CD is not appropriate for younger investors, it is very appropriate for older investors who are either near or at retirement age. CDs are low-risk investments, that when issued by a bank, are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures a CD held in a retirement account up to $250,000. While a CD will probably not increase in value the way stocks or mutual funds will, it will usually pay more than a regular checking, savings, or money market account.
Typically the best rates on a CD will be one with longer terms. CDs are known as "time instruments". The purchaser invests a fixed dollar amount for a fixed period of time. While there are other timeframes available, the most common are six months, one year, and five years. Interest is paid on the CD at regular intervals and when the CD is redeemed, the investor is paid the original purchase price along with the accrued interest.
Finding the best rates on CDs will depend on the type of CD purchased. For example, the traditional CD described above usually pays the least. A "bump up" CD allows the owner to increase his or her returns in an environment of rising interest rates. A "liquid" CD provides the owner with the opportunity to withdraw a portion of the money from the CD without incurring penalties. The "zero-coupon" CD functions in much the same way as a zero-coupon bond. A "callable" CD can be issued at one rate and then "called away" by the bank, only to be returned to the owner at a lower rate. Finally, a "high-yield" CD pays a higher rate than the other types of CDs.
Getting the Best Rates on Bonds and Bond Funds in an IRA
United States government bonds are among the safest bonds in the world. These bonds, known as US Treasuries, are backed by the full faith and credit of the United States government. The US offers three types of treasuries: Bills, notes, and bonds.
Treasury bills, also known as T-bills, are issued with maturity dates of one year or less. They are auctioned for sale once per week and purchased primarily by banks and brokerage houses that resell them to retail customers. Rates fluctuate based on availability and interest rates, so getting the best rate usually depends on when you buy them and from which company.
Treasury notes mature between one and 10 years. Unlike T-bills, which are zero-coupon bonds (meaning they don't pay interest until the maturity date) Treasury notes have a coupon payment structure that pays the owner interest every six months.
Treasury bonds have the longest maturity dates, ranging from twenty to thirty years. Interest is paid every six months. Most commonly purchased by institutional investors, Treasury bonds can be purchased by an individual as part of an IRA. They are also the mainstay of fixed income funds.
Corporate and municipal bonds can also be purchased individually or as part of a bond fund. These bonds usually pay a higher yield than Treasuries because they present a higher risk of default for the owner. In other words, a corporate bond may pay a significantly higher amount of money to the investor every six months, however, if the corporation suffers a loss in credit rating or declares bankruptcy, the bondholder may not see his or her money returned. Corporate bonds are almost always better off held in bond funds that spread the risk of default.
Increasing the Rate of Return on an IRA with Stocks and Stock Funds
While CDs, bonds, and bond funds are the safer investment choices, the best rates, and therefore typically the best returns in any IRA will be from stocks and equity mutual funds. Common wisdom prior to 2008 maintained that "buy and hold" was the best way to manage stocks in an IRA account. However, as industries and economies change, it has become clear that most investors must at the very least understand how fluctuations in world markets will affect their investments.
All investors, regardless of age, should maintain at least a few growth stocks or funds in order to offset the effects of inflation. While most people think they shouldn't own stocks in an IRA after they're retired, some portion of their assets need to continue growing. If retired investors aren't comfortable with owning stocks in individual companies, they should at least look to mutual funds or ETFs. The diversification offered by mutual funds ensures that even if the price of one or two stocks suffer a significant drop, the returns will be held up by the other stocks in the fund. Further diversification can be obtained by owning funds that specialize in different market sectors and even in different countries.
Exchange Traded Funds in an IRA Account
Exchange traded funds (ETFs) are the latest – and very popular – method of getting the best rates of return within an IRA. Unlike the buy and sell price of a mutual fund that is determined at the end of the day, regardless of what time in the day an investor buys or sells the fund, the price of an ETF is determined at the time he or she buys or sells it. In other words, an ETF is a kind of mutual fund that is traded just like a stock. If an investor buys the EFT at 1:01 p.m. for $54.00, that's the price he or she pays. With mutual funds, if the price is $54.00 at the time the investor buys it at 1:01 p.m., the price could be higher or lower at the end of the day when mutual fund prices are determined.
EFTs are generally associated with lower fees. ETFs are not only cheaper to buy and sell, they're also cheaper to hold. Most brokerages allow investors to buy and sell EFTs just like common stock ($5-$15 per trade), whereas mutual funds qualify for higher per-transaction fees ($15-$50). But perhaps the bigger advantage of ETFs is their relatively low management fees. Where as a top mutual fund may charge a 3% annual fee, ETFs generally charge 1%. As you save for retirement over the course of 30 years, that 1-2% difference can add up.
Like mutual funds, ETFs offer diversification and a way to invest in multiple companies, sectors, and even countries at the same time. Along with the ability to trade stocks as part of ETFs, investors also have the option of trading exchanges, currencies, and precious metals. ETFs can be traded in traditional, Roth, and SEP IRA accounts in order to boost returns over standard CDs, bonds. and stocks.
While we've covered the basics of IRA investing here, there is much more to maximizing the success of you IRA. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
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