Why Your IRA Might Earn More for You

Everyone knows they need to be saving for their retirement. We also have been told that the earlier we start, the better off we will be, even if it is just a small amount of money in our twenties.

However, once a Roth or traditional IRA is opened, and contributions are made, perhaps the bank statements will show that this money is earning horrifically low interest. Less than one percent interest is not a great return, and is hardly worth mentioning for smaller sums of money. This can make one debate the merits of diversifying into the stock market, or other options of investing.

There might be other options for your IRA. A quick phone call to your financial institution will tell you if you can invest your IRA in a CD, or certificate of deposit. There are minimum balances required, usually around $1,000 for credit unions. If you have more than that, you could lock your retirement money into earning a higher interest rate for up to 36 months, depending on where your money is parked. The interest rate will be higher than that of a regular savings account, which is most likely how an IRA will be classified.

Typically, the longer the time the money is invested, the higher the interest rate will be. Since these funds are earmarked for use far down the road, they can be safely locked up for the longest period of time available, and maximize interest earnings. An even greater advantage is compounded interest.

While most of us know compounded interest in a negative way, such as with credit cards, it can be most beneficial in terms of savings. Your interest is added to your balance and gains even more interest- a much nicer feeling than your debt's interest gaining interest, I assure you! An extra $200 a year, compounded for 30 or 40 years, really adds up. Settling for a lower interest rate just does not make fiscal sense.