I want to grow/invest my money (I have a very small Ph.D. stipend, but still) and I do not understand clearly the options I have. I know person can invest in IRA/Roth IRA, 401(k) or saving accounts, CDs, stocks, etc.

I checked that 5 year CDs offer around 2.1% annual APY and are FDIC insured in most major banks.

What APY should I expect from my IRA or 401(k) accounts? I guess it should be much larger since I cannot touch my money before my retirement, so it is basically "super-long-term CD".

As far as I understand your money is being invested in stocks in IRA or 401(k) accounts, right? So if something bad happens to markets, your money in these retirement accounts can be partially lost, correct? As far as I understand it is not insured by the government. Then what is the point of investing in retirement accounts? Unless the expected income exceeds 5 year insured CDs by a reasonable amount.

In short: I want to understand pros and cons of investing into FDIC insured CDs versus IRA/Roth IRA/401(k) accounts.

2 Answers 2


First, you need to understand the difference in discussing types of investments and types of accounts.

Certificate of Deposits (CDs), money market accounts, mutual funds, and stocks are all examples of types of investments.

401(k), IRA, Roth IRA, and taxable accounts are all examples of types of accounts.

In general, those are separate decisions to make. You can invest in any type of investment inside any type of account. So your question really has two different parts:

  1. Tax-advantaged retirement accounts vs. Standard taxable accounts

  2. FDIC-insured CDs vs. at-risk investments (such as stock mutual funds)

Retirement accounts vs. taxable accounts

Retirement accounts are special accounts allowed by the federal government that allow you to delay (or, in some cases, completely avoid) paying taxes on your investment. The trade-off for these accounts is that, in general, you cannot access any of the money that you put into these accounts until you get to retirement age without paying a steep penalty. These accounts exist to encourage citizens to save for their own retirement. Examples of retirement accounts include 401(k) and IRAs.

Standard taxable accounts have no tax advantages, but no restrictions, either. You can put money in and take money out whenever you like. However, anything that your investment earns is taxable each year.

Inside any of these accounts, you can invest in FDIC-insured bank accounts, such as savings accounts or CDs, or you can invest in any number of non-insured investments, including money market accounts, bonds, mutual funds, stocks, precious metals, etc.

FDIC-insured investments vs. at-risk investments

Something you need to understand about investing in general is that your potential returns are directly related to the amount of risk that you take on. Investing in an insured investment, which is guaranteed by the government to never lose its value, will result in the lowest potential investment returns that you can get. Interest-bearing savings accounts are currently paying less than 1% interest. A CD will get you a slightly higher interest rate in exchange for you agreeing not to withdraw your money for a period of time.

However, it takes a long time for your investments to grow with these investments. If you are earning 1%, it takes 72 years for your investment to double.

If you are willing to take some risk, you can earn much more with your investments. Bonds are often considered quite safe; with a bond, you loan money to a government or corporation, and they pay you back with interest. The risk comes from the possibility that the government or corporation won't pay you back, so it is important to choose a bond from an entity that you trust.

Stocks are shares in for-profit companies. Your potential investment gain is unlimited, but it is risky, as stocks can go down in value, and companies can close. However, it is important to note that if you take the largest 500 stocks together (S&P 500), the average value has consistently gone up over the long term. In the last 35 years, this average value has gone up about 11% annually. At this rate, your investment would double in less than 7 years.

To avoid the risk of picking a losing stock, you can invest in a mutual fund, which is a collection of stocks, bonds, or other investments. The idea is that you can, with one investment, invest in many stocks, essentially earning the average performance of all the stocks. There is still risk, as the market can be down as a whole, but you are insulated from any one stock being bad because you are diversified.

If you are investing for something in the long-term future, such as retirement, stock mutual funds provide a good rate of return at an acceptably-low level of risk, in my opinion.

  • +1: but in addition to a mutual fund you could also choose an ETF Commented May 22, 2017 at 11:09

For the period 1950 to 2009, if you adjust the S&P 500 for inflation and account for dividends, the average annual return comes out to exactly 7.0%.


Currently inflation is around 2%. So your 2% APY is a 0% real return where the stock market return is 7%. I.e. on average, stocks have a return that is higher by 7.

If you mix in bonds, 70% stocks to 30% bonds, your real returns will drop to around 5.5%, but you are safer in individual years (bonds often have good years when stocks have bad years).

  • So if you're investing long term, the stock market will usually do better than CDs. On average, based on past performance (which may not repeat). Some years it will be higher; other years it will lose money.
  • Retirement accounts have improved protection in bankruptcy. I.e. you may not have to turn over your retirement accounts to discharge your bankruptcy.
  • Retirement accounts have tax advantages. In particular, they avoid double taxation. Double taxation occurs with a savings account since you pay tax even if inflation is more than the interest rate. Retirement accounts tax only at the beginning or the end. They don't tax growth in between.

We're making a bit of a false dichotomy here. We're talking about returns on stocks in retirement accounts versus returns on CDs in regular accounts. You can buy stocks in regular accounts and it is legally possible to have a CD in a retirement account. So you can get bankruptcy protection and tax advantages with a CD.

  • I.e. on average, stocks have a return that is higher by 7. That is not what that means, at least not the way I read it. Higher by 7 basis points, perhaps, but that's not a common way to read that.
    – Joe
    Commented May 22, 2017 at 5:51

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