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Should You Invest Your IRA in a Savings Account or CD? For Most People the Answer is No.

by Ryan Guina

Investing is a overwhelming topic when you are starting out. It can be complicated and it can be risky. You want to protect your hard-earned money from losses. Just look at what happened in 2008-2009 when the US stock market crashed and we entered the Great Recession. Big market events like the Great Recession and the DOtcom bubble leave a lasting impact that investors don’t soon forget.

There are also people out there who are looking to separate you from your hard earned money. I can speak from personal experience on this one. The first investment I made on my own didn’t end well. It turns out the investment advisor I went to was more interested in furthering his own gains than giving me good investment advice (he sold me a very expensive fund with a very high front load, or up front payment). It was an expensive lesson I will never forget!

invest Roth IRA in savings account

Should you invest your retirement funds in a savings account?

Don’t Let Fear Guide Your Investment Decisions

These opening paragraphs sound scary. I won’t deny that it can be scary to invest in the stock market. But that doesn’t mean you should avoid them either. There are “safe(r) investments” out there. But over the long run, they may not return enough money to outpace inflation. In other words, if you want to invest for retirement, you will most likely need to dip your toes into something more risky than savings accounts and certificates of deposit (CDs).

We recently received a reader question about safely investing money for retirement:

With interest rates so low, is it wise to invest in a savings type of Roth IRA as opposed to an investment account? I have no understanding of the world of finance and just want to build a reliable nest egg as I am self-employed.

~ Kat

You Need a Diversified Investment Portfolio – Not Just a Savings Account

Kat, I understand where you are coming from. I am also self-employed, and it can be a challenge to provide for my family today, while keeping an eye on the future. But as safe as the principal (the amount you deposit) is in a savings account, it’s actually not a safe way to invest over the long run. Over time, inflation will likely outpace the amount of interest you earn in a savings account. You will still end up with a larger dollar amount than you started with, but you will have less purchasing power overall.

The only way to outpace inflation is to invest in something with a little more risk than a standard savings account or CD. And that means in vesting in the stock market, in real estate, or in other areas.

This is where a diversified investment portfolio comes into play. Investing your money in a variety of places can help protect your investments over the long run, as some investments will tend to do better than others at any given time. Keeping your money in different investments also helps mitigate any losses you may have.

Here are a few articles to help you understand some broad investing concepts:

These articles will give you a good starting point to understand some of the basics.

There are also some great tools to make asset allocation easier on you, and the best news is that many of them are free. My favorite is Personal Capital. You can sign up for a free account, or read our Personal Capital review to learn more.

When to Invest Retirement Funds in Savings Accounts

Investing some or all of your retirement account into a savings account or CD isn’t necessarily a bad idea some of the time. But it’s rarely a good idea to put all of your retirement savings into savings accounts all of the time, unless you are already retired or absolutely need to be on a fixed income and absolutely cannot afford any losses.

For everyone else, keeping all of your investments in savings accounts is usually only best as a temporary solution during times of transition (moving money between accounts), or when you believe the markets are overvalued. Savings accounts are generally not much of a long-term investment for those who are trying to grow their portfolio enough to outpace inflation. This is why it’s often best to open an IRA with a company that offers a variety of investment options.

How to Get Started in the Stock Market

If you are intimidated by investing, are concerned you might make a mistake, or simply don’t know where to start, then consider starting your investment with a Target Date fund. These investments automatically allocate your money across several different asset classes (types of investments) and automatically balance your holdings as time goes on. This takes the guess-work out of investing and gives you the opportunity to match the stock markets (minus investing fees). These investments aren’t perfect, as some are designed differently or may come with fairly high fees. But they are a great place to start. From there you can take your time learning more about the mechanics of investing and dip your toes into other forms of investing as your knowledge and comfort level grow.


Published or updated March 7, 2014.
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{ 2 comments… read them below or add one }

1 Bryce @ Save and Conquer

I agree that target date funds are great for people who may be intimidated by investing. My only hesitation would be to make sure the fund that is chosen in not too aggressive for the investor. Due to marketing pressures, many target date funds are overly aggressive for their target date. Many people found this out in 2008 when they lost a larger portion of their 401(k) than they could stand, and they sold out of the market as it declined. Target date funds should be chosen based on their asset allocation and not necessarily their target date.

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2 Ryan Guina

I agree 100%, Bryce. Great advice.

The goal of this article is to help people get past the fear of investing in the stock market and take action, which is often the most difficult step to take. Once they take action and get past the initial fears, it is easier for the individual to start learning more about investing so they can make more decisions appropriate for their needs and risk tolerance.
Most people will end up making some mistakes along the way (I’ve made my fair share!). But investing in funds that are slightly too conservative or aggressive is much better than investing an entire portfolio in a savings account where the investor is all but guaranteed to lose purchasing power in the long run.

The key is to take that first step, then commit to learning more about investing so you can make more informed decisions as you go.

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