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High Yield IRAs

Posted By Jim On 04/20/2010 @ 7:30 am In Retirement | 10 Comments

All throughout tax season, from about mid-February to early-April, I received letters from my banks telling me it that I was running out of time to contribute to an IRA. This happens every year because brokers and banks want your business. They want you to open your IRA with them. The letters pitch various products and the most intriguing one I saw this year was a letter from Everbank advertising a high yield IRA.

Everyone likes a high yield IRA, right? Reminds me a little of this insight into retirement wealth:

  1. Open high yield IRA.
  2. ???
  3. Profit!

The problem is that the term “high yield IRA” is a misnomer. The IRA isn’t high yield, the “investment” inside is what makes it high yield and in the case of any bank that markets a high yield IRA, that investment is a certificate of deposit. At Bank of America [3] it’s a 2.10% APY 30-month high yield CD with a $2,000 minimum balance. At Everbank [4], it’s a 1.40% APY 1-year CD with a $1,500 minimum balance. These rates, adjusted for the tax benefits of IRAs, are comparable to the best CD rates [5] available.

Banks have been marketing these high yield IRAs because they are safe. CDs, whether inside or outside an IRA, are still FDIC insured and your principal is protected. Unlike stock market investments, the dollar value of your CD will never decrease. This is very appealing after such a volatile year in the stock market but it may not be the most prudent choice.

Do they make sensible retirement investments? It depends on your needs.

  • If you are near retirement and are looking to draw income from your IRA, a CD in your IRA may be the right choice. At this point in your financial plan, you’re looking to draw down your retirement assets and you will need investments that support that goal. It may make sense for you to put a portion of your portfolio in ultra-safe CDs.
  • If you’re many years from retirement, a high yield CD in an IRA may not be the most prudent financial choice. We’re in this group and we’re decades away from retirement. Our retirement assets are invested in the stock market. The volatility is scary but putting it in a CD earning 2.10% or 1.40% will simply not get us to our retirement goals, especially when you consider inflation. We benefit from Father Time smoothing out the volatile markets so the stock market is a better option for us.

You will need to analyze your situation to find the best choice but I felt that, after receiving all the mailers about “high yield IRAs,” I needed to address the misnomer.

Have you received similar mailers? What did you think of the offers?

(Photo: OakleyOriginals [6])

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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/high-yield-iras.html

[3] Bank of America: http://ira.bankofamerica.com/products/high-yield-cd/Default.aspx?section=products&subsection=high_yield_cd&bhcp=1

[4] Everbank: http://www.everbank.com/002IRA.aspx?referID=12718

[5] best CD rates: http://www.bargaineering.com/articles/best-cd-certificate-of-deposit-rates.html

[6] OakleyOriginals: http://www.flickr.com/photos/oakleyoriginals/3538458783/sizes/m/

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