History

• In 1974 Congress passed the Employee Retirement Income Security Act, which sanctioned the creation of IRAs. Initially, people could contribute $1,500 per year, and only those without employee-sponsored retirement plans could establish IRAs. During the 1990s, Congress introduced Roth IRAs and raised the contribution limits for all forms of IRA accounts. In 2006 the income requirements were raised to allow higher earners to contribute to Roth IRAs. As of 2010, maximum IRA contributions are $5,000.
  
  

Effects Of Interest Rates

• The Federal Funds Rate is set by the Federal Reserve Board; it establishes the rate at which banks in good standing can lend to each other and borrow money from the government. The Prime Rate is always three percent higher than the Federal Funds Rate, and banks use the Prime Rate to determine the rates on CDs. When low long-term rates are forecast, banks offer low CD rates, and short-term CDs have the lowest rates. The reverse happens in inflationary environments.
  
  

Significance Of Rates

• Most banks require minimum investments of $1,000 or more in regular bank CDs. Most IRA CDs, on the other hand, do not have minimum deposit requirements because many people periodically add money to them throughout the year. Most CDs allow contributions only at inception, so banks price the flexibility of IRAs into the product by offering low interest rates. Bank IRA CDs often have very low returns because they do not require much investment from clients, whereas regular CDs entice large dollar investors with high yields.
  
  

Time Frame

• Many IRA CDs do not have conventional term times; they are open-ended products that pay a nominal interest rate and allow investors to add funds or transfer funds with few restrictions. The Internal Revenue Service does asses penalties if IRA funds are transferred to non-qualified accounts or withdrawn as cash prior to age 59 1/2. The IRS also requires account owners to begin taking withdrawals from traditional IRAs no later than age 70 1/2. Regular CDs have time frames of between a few days and several years.
  
  

Considerations

• The Federal Deposit Corporation insures IRA accounts up to a maximum of $250,000 per financial institution. The FDIC aggregates balances from traditional, Roth and educational IRAs, so investors with total balances beyond that limit should move some funds to other banks to ensure full coverage. CD accounts also benefit from FDIC insurance, and joint-ownership, trust, estate and beneficiaries accounts have extended FDIC coverage of $250,000 per person. With IRA accounts, the FDIC only protects the owner.