I'm confused about IRA CDs

[CathyA]

Yes, I know they don't make much money.....not even to keep up with inflation, so just know that I know that already. :)

I was talking online with someone from the credit union I do a fair amount of business with. I really like them and they seem quite reputable and helpful.

Anyhow.....now that it's tax time and I need to take my 2015 IRA contribution, I'm debating whether I want to go with an environmentally-careful mututal fund or get another CD from my credit union.

I feel very insecure investing in stocks. I do have a little in several socially conscious mutual funds.
Anyhow.........I asked this person if it were possible to find out what they do with all my CD money. I was thinking that they use it to invest in things of their own choosing. He said "no....they don't do anything with the money. It just sits there and earns interest." Huh??? It's my understanding that they take all this money and invest it themselves somewhere......right? When I asked him further, he said "they invest it in their own CDs". Am I wrong in thinking he doesn't understand that this money goes towards funding certain things..........whether it be building something or off-shore drilling, or weapons or whatever, right??
Maybe I'm just really confused, but I can't imagine the money just sits there............although with the incredibly low interest the CDs make, maybe it does!

Can anyone educate me?
Thanks!

[SteveinMN]

I can't educate, as such. But I know that banks/credit unions have to have a certain amount of funds on hand for operations and as a cushion. Perhaps that's where the money for CDs is kept.

[Rogar]

I am hardly the expert, but banks and credit unions are required to keep a certain percentage of their deposits as some paper form of cash. I would strongly suspect that most of this is kept on deposit at a Federal Reserve bank, where they probably do get some interest. The remainder above this required cash reserve is probably lent out to other members of the credit union for what ever type loans they might need. Personally, I would not have any hesitation in investing in their CD's if socially responsible investing were a primary concern. But I'm not the expert.

[rodeosweetheart]

No education here, but you can chose a CDFI like ShoreBank in Chicago and they have socially responsible cd's

http://www.bankrate.com/financing/investing/socially-responsible-cds/

[CathyA]

Thanks guys! I was having trouble thinking this through. Thanks rodeo......that's a very interesting link! I'll look into that more.
I do have a little in socially responsible/environmental mutual funds, but I just don't want too much in there. I have a bunch of IRA CDs in my credit Union.......but the interest is so low, it should be illegal. haha
When I first started putting money into IRA CDs........they were offering 4.0%! Wish they'd come back to that.
Thanks for helping me understand this everyone!

[Zoe Girl]

I don't know much about the socially responsible choices, but I had a small retirement fund in some type of mutual funds (it was from my divorce so I didn't have a lot of energy to work with it then). It flattened out badly, earning like $4 a year in that fund. So I moved it laddered CD's. I checked out some banks and was happy with Ally for ratings and rates. I split it up and now I have an IRA cd that matures every 6 months up to 5 years. A 12 month cd has a low rate, but when it comes up for renewal you make it a 3-5 year CD based on your plan which gets a better rate. So there is a a CD maturing every 6 - 12 months but since they are 5 year CD's they get a better rater than a lot of 12 months CD's. My total is about $20K laddered out for 5 years and it is doing better than other options with pretty much zero risk. Maybe when the economy is more stable I will think about other options and options for new money, but for right now it is on automatic except for checking in a couple times a year on ones that are coming due. I was even able to set up the renewals a month ahead of time and I get a slightly higher rate for keeping it with the same bank.

[rosarugosa]

I can't imagine they're paying interest as a public service on funds they are earning zero interest on themselves; that just doesn't make any sense to me.
I had started a CD ladder with Barclay Bank. That's where I have my online savings account and they pay 2.25% on a 5-year CD. Then I realized I'll be over 60 in 5 years, and it would be crazy not to do these in a Roth. Discover Bank has a CD Roth option that pays 2% on a 5-year CD, so that's where I'm planning to do my next rungs.
My 401k and DH's IRA are weighted towards stocks, so I think of this as part of our cash reserves/E-fund.