Phoenix Training & Development

Author: Peter Kenny | Posted: 26-10-2007 | Comments: 0 | Views: 9 |

The term CD stands for Certificate of Deposit. A CD is simply a short- to medium-length investment. They are FDIC insured and are available for purchase at banks, credit unions, and savings and loans. CD’s are a good way for some consumers to get higher interest rates on their money, but there are some issues associated with them that consumers should know about before signing up for one.

In basic terms, CD’s operate like this: You will put a certain amount of money into the institution for a certain amount of time. The institution will use this money for various purposes. In exchange for investing your money with them, you are promised a predetermined interest rate on the money, as well as having your money protected by the FDIC. The FDIC is the Federal Deposit Insurance Corporation, and it protects your money in case the bank or savings and loan fails.

Buying CD’s is a good, safe way to invest money but it does have some drawbacks. For one, once you buy the CD you are not allowed to withdraw that money without incurring a penalty fee. This is for withdrawals that take place before the CD matures. Another drawback can be the length of time that a CD takes before it matures. This length of time can vary greatly but it is common for many CD’s to mature between 1 year and 5 years. There are shorter term CD’s as well, and there are longer term CD’s, some maturing at 10 to 20 years. It is important to understand the maturity length before you sign up for one, and to understand that this money will be tied up in the CD for that length of time.

A certificate of deposit is very useful for certain people. Because it is a very low risk investment it can be especially useful for elderly people and for young people who want to get started with their savings. It is also a good way to invest for those people who have limited amounts of money that they can invest.

All consumers should make sure that they are getting their CD from an FDIC-back source. Normally, you will know this if you are buying the CD on your own at your bank, but if you are using a broker to buy the CD for you, make certain that you know which bank is issuing the certificate of deposit, and that the bank is insured.

Before you buy your CD, sit down with the bank and find out how the interest rate works. You may be getting a fixed rate on your CD or you may be getting a variable rate. It is important to know which is being attached to your CD as this will affect your profit. If you are buying a jumbo CD (a CD that is over $100,000) make sure you talk about the issue of protection. The FDIC only backs up to this amount and you will want to know what the financial institution can do to help protect the money you invest above this limit.

Lastly, rates for CD vary so you may want to shop around to find the institution that offers the best rates for your certificate of deposit.

A Roth IRA is a type of individual Individual Retirement Account (IRA) that is named after the US senator William V. Roth who was the chief legislative sponsor of this scheme of retirement accounts. Roth IRAs are different from other IRAs in many ways. Roth IRAs were established in the year 1998 (Public law 105-34). Similar to other IRAs, the Roth IRAs are also created to encourage the members of the active work force to save regularly in order to be able to meet their post retirement financial needs. This calls for a disciplined approach on the part of the account owner and requires regular contributions towards the retirement account. It also provides twin benefits to the account owners. The tax-deductible net income is reduced by an amount equivalent to the IRA contribution and the assets also earn returns by way of investment into various financial instruments such as stocks, mutual funds and bonds in which the IRA assets are invested by the account custodian or the administrator.

The biggest advantage enjoyed by a Roth IRA account owner is the tax benefits offered by the government on such schemes. A Roth IRA accepts contributions from the income earned in a financial year that has already been taxed and allows federal income tax free withdrawals up to the total assets held in the account by the account owner. Even the earnings on the assets in a Roth IRA are often free of federal income tax. This is in contrast to other IRA schemes where the contributions are made from tax-deductible income but the distribution or withdrawal of funds is considered as taxable income. However, the there is an overall limit on contributions to all IRAs including the Roth IRA in a particular financial year. The total of all the contributions in different IRAs should not exceed that limit. Roth IRAs are considered superior to other IRAs because of the tax-free distributions or withdrawals allowed in this scheme of retirement accounts. This has made Roth IRAs very popular in a short span of time.

Another type of Roth IRA called the Self-Directed IRA even allows investments into non-typical assets such as real estate and other exotic investment avenues that are generally shunned by the traditional IRA schemes. The discretion of deciding about the nature of financial instruments in which IRA assets are invested lies with the account custodian or administrator. He can decide the asset classes to which the IRA funds can be allocated. At a more fundamental level, the type of an IRA account held by an investor is also a major deciding factor about the nature of investments made with the corpus. Since IRAs have a low risk profile, volatile instruments are avoided and this makes the common debt instruments such as the US treasury bonds very popular amongst the IRA investors. Next in class are mutual funds that are again considered stable and less volatile compared to investing in stocks with high volatility. Even in equity stocks, the IRA investments take a long-term view of holding the securities and do not indulge in short-term trading.

Author: Mike Power |