Purpose

• Losing all (or a substantial portion of) your retirement savings due to improper investing would be devastating to your retirement plans. A traditional bank IRA will help to protect your savings. Bank IRAs generally invest in a fixed interest investment product called a bank CD. This CD pays a guaranteed interest rate set by the issuing bank. With this investment, you'll know in advance how much money you'll make over time.
  
  

Significance

• The bank CD is a certificate of deposit. It's a time deposit. This means that the bank takes your contributions and invests them on your behalf. The bank seeks steady growth and income in their investments and may invest in other loans, like mortgages, or bonds. These investments generally pay a fixed rate of interest. As long as the investment isn't defaulted on, it will pay the stated rate to the bank, which in turn will credit your bank CD with the appropriate interest outlined in your agreement with the bank. The bank sets a time limit on the investment and a date when you can expect to receive your principal amount back. This date is called the maturity date.
  
  

Benefit

• The benefit of a traditional bank IRA is that you receive interest on your money that is known in advance. You don't have to guess about how much money you will earn on your investments. Since the rate is fixed, you can make better, more certain plans about your retirement income. Additionally, the IRA shields you from paying taxes on your investment. This allows you to accumulate more money with your bank CD than you otherwise would be able to outside of the traditional IRA.
  
  

Disadvantage

• The disadvantage to traditional bank IRAs is that a traditional bank IRA may pay a low interest rate. This is because the fixed rate must be low enough so that the bank can guarantee the rate for the life of the CD. If the interest rate paid to the bank is below the rate of inflation, you stand to lose value on your savings. You also must pay a penalty if you cash in the bank CD prior to the maturity date. The penalty is normally three months worth of interest. What's worse, you cannot cash in only part of a CD. The entire CD must be cashed in. If you are doing this during retirement, you are basically losing 1/4 of your annual return so that you can withdraw money to live on, which could amount to a substantial amount of money for the year.