CDs and IRAs
A certificate of deposit (CD) is a valuable security that confirms the deposit amount deposited with the bank and the rights of the depositor (certificate holder) to get the deposit amount and the interest defined in the certificate after the expiry of the specified term. Certificates of deposit can be personal and bearer. They are issued only as hard copy.
The qualities of a certificate of deposit as a security give it a number of advantages over a deposit:
- a certificate of deposit has greater liquidity than a deposit agreement and can be resold;
- it is sufficient to hand over this certificate to this person to transfer the rights under the bearer certificate to another person;
- the rights certified by the personal certificate are transferred in the manner established for the assignment of debts;
- a certificate of deposit can be pledged, i.e. use it as collateral when holding credit transactions with the bank.
Advantages of a certificate of deposit
- Simplified procedure for depositing funds: no account opening required;
- Paperwork and issuance of a certificate of deposit is carried out within a few hours;
- Fixed interest rate, unchanged during the entire period of the placement of funds;
- A simplified procedure for signing an agreement on the assignment of receivables;
- The ability to receive funds and interest on a certificate of deposit at any bank office, regardless of where the certificate was issued.
What is an IRA?
One of the most famous type of American retirement plan is the so-called IRA (Individual Retirement Account). Investment opportunities are also wide there, but in accordance with this plan, no more than $ 5,000 per year can be deducted to a personal account. Money deposited into a personal account in accordance with the Roth IRA is taxed at the entrance to the system and is not taxed when it is received in old age, that is, at the exit (TEE scheme). Accordingly, there are no penalties for early withdrawal. Under the Traditional IRA scheme, contributions are tax-free and there are pre-retirement withdrawal penalties.
The beneficiary can open a new legacy retirement account from different types of eligible IRAs. This list includes:
- traditional retirement account (traditional IRA);
- Roth (the retirement account is tax-free);
- Rollover (transfer of funds from a retirement account to a traditional or ROTH account by direct transfer or by check);
- SEP (Simplified Employee Pension);
- SIMPLE (employer funded retirement plan for small business workers).
Assets that are in the retirement account of the deceased person must be transferred to the new account of the testator. This transfer must occur even if a lump sum distribution is planned. The living spouse can transfer assets to their account. Contributions cannot be posted to the legacy IRA account.
If the owner has already started receiving minimum distributions (RMDs) at the time of death, the beneficiary must continue to receive retirement income. However, the testator needs to calculate and submit a new schedule for the payment of pension funds based on their own life expectancy. If the IRA holder has not chosen an RMD schedule or is 70.5 years old. The IRA beneficiary has 5 years to withdraw funds, which will then be subject to income tax.
CDs vs IRAs
IRA (Individual Retirement Account) is an account for retirement savings (recall that the rates on ordinary bank CDs are about 1% per annum). Americans open IRAs themselves in any financial institution (bank, broker, mutual fund). You must also deposit funds to your account yourself (as often as you like, but the total amount of top-ups per year should not exceed $ 5,500).
The tax on funds in retirement accounts is paid once – upon retirement, before that they are tax-free. This limits the maximum replenishment amounts per year: $ 5,500 for an IRA and $ 18,000 for a 401k.
The US has a progressive tax rate – the larger the amount, the higher the tax incurred. Therefore, many Americans do not wait for retirement to pay tax, but choose the Roth option (accounts are then called Roth IRA and Roth 401k). In this case, each deduction to the pension account takes place after the salary tax has been paid, and there is no need to pay taxes again upon retirement. This allows you to save on taxes in the future, when a decent amount accumulates in your retirement account.
Bank deposits are one of the oldest investment methods. Bank deposits are very safe, as all funds on them are insured by the Federal Deposit Insurance Corporation. In the United States, inflation is low (2.5% for 2018), but the interest rate on CDs is even lower – no more than 1%. In addition, this money is lost if the money is withdrawn from the account before the deadline specified in the bank agreement.