CD, IRA, or 401(k)?

Q: Since there won’t be any social security by the time I’ll be of age to collect it, what would be the best vehicle to invest in for the next 40 years — an IRA, CD, or 401(k)?
— D. Williams , Via the Internet

A: Since you are talking about investing over a 40-year period, you should look at using both a 401(k) and an IRA for retirement. If a 401(k) is offered at your job, enroll in it and invest as much as you can, saving a percentage of your pre-tax income each pay period — up to $15,000 for 2006. And if your company matches employee contributions, you’ll save that much more money. If you leave your company, you can roll over your 401(k) into a traditional IRA account, which will allow you to continue earning interest tax-deferred until you withdraw the funds in retirement.

Once you get to where you can contribute the maximum amount to your 401(k) and you have additional income to save, look to open a Roth IRA. You can also turn to a Roth IRA if your employer doesn’t offer a 401(k). A Roth IRA allows you to save after-tax income toward retirement and withdraw tax-free in retirement.

A certificate of deposit is not the best choice for someone with more than 40 years to invest. CDs are fixed-rate investment vehicles that won’t give you a very high investment return over time. While a CD would allow you to keep your principal investment, you would miss out on opportunities to earn higher returns from the stock market investments available through the 401(k) and IRA options.