What are CDs and IRAs?

Banks are most commonly known for services such as savings accounts, but it seems that every time you walk into a branch (or glance at a bank's website,) that they have other services available, in particular, IRAs and CDs. While they may seem uninteresting now, learning about these two products and other long-term services your bank offers can be a great help in the long-term. It's easy to get confused between these two products, so here's a breakdown:

A CD, or certificate of deposit, is like a long-term savings account, perfect for saving for large goals such as cars, houses, or big purchases you know you will make ahead of time. It works much like a savings account, with a couple key differences. One is that the interest rate is much higher than that on your regular savings account. Rates can range from 3.5% to 4.5%, depending on your bank. Another is that you must have a minimum amount to deposit that is significantly higher than regular bank savings accounts. CD minimum deposit rates can range from $500 to $10,000 and beyond, making them ideal for larger purchases.

While they have great benefits, CDs can also have risks. First, there is usually a penalty for withdrawing your money before a certain time period. This is to compensate for banks offering you a much higher interest rate than usual. Second, interest rates are extremely prone to change, as the current stock market situation has shown, so it is important to put money in one that you think will fluctuate the least over the given time period. Other than this, CDs are great for impulsive spenders who want to save large amounts of money for prolonged periods of time.

Another great tool that's never too early to invest in is an IRA, or individual retirement account. There are several categories of IRAs, but generally they are all ways to contribute to your retirement plan from your personal income, usually by contributing a matching amount of compensation. This concept may be tax-deductible. The best way to find out about the different kinds is to go to your local bank or credit union and have a representative explain them at work.

While retirement may seem like a long ways away, remember the anecdote that, if you start saving now, at small interest-bearing increments, you could potentially save up to $1 million by the time you retire, which will be enough, provided that Social Security is no longer a given. A great website that will get you started on understanding more about the different types of IRAs (Roth, traditional, SEP, and simple,) is Individual Retirement Account at Wikipedia, a s well as the official government website Retirement Plans FAQs regarding IRAs.

It's also important to contribute to your 401(k) plan at work, if this is offered.

These two tools seem like something to use later on in your 40s or 50s, but if you become familiar with CDs and IRAs now, you will be way ahead of the game when it comes to retirement.