An IRA CD is an individual retirement account that holds certificates of deposit (CDs). IRA CDs are low-risk and easy to invest in, though usually have limited earning potential. Because of this, IRA CDs are recommended for those who are close to retirement or have already retired and are looking to diversify their portfolio.
Many people who are retired (or close to retirement) have an individual retirement account. One of the best things about these accounts is you have the ability to invest money from this account into stocks, bonds, money market accounts, and certificates of deposit.
If you’re looking for an easy and safe investment option for your retirement funds, you may want to consider an IRA CD. A CD, or certificate of deposit, is a federally insured savings account that sits untouched in your account for a period of time. An IRA CD is a great option for those who want to invest their money and aren’t sure how to or want to diversify their portfolio. Keep reading to learn more about IRA CDs and see if they’re right for you.
What is an IRA CD?
An individual retirement account (IRA) is an investment account that helps people build their retirement savings. Money in individual retirement accounts grows on either a tax-free or tax-deferred basis. IRA funds can be invested in stocks, money market accounts, bonds, and certificates of deposit. There are a few different types of IRAs, which you can learn about here.
An IRA CD is when someone takes their individual retirement account and invests it in a certificate of deposit. This is generally seen as a low-risk investment, as rates are fixed for the duration of the term.
IRA CDs are opened through brokerage firms, banks, and credit unions. You can invest both a Roth IRA and a traditional IRA into a CD. You don’t have to invest all your IRA money into a certificate of deposit. If you wanted, you could put some in the stock market, a money market account, and a certificate of deposit. Many people choose to invest their IRA money into a CD so that they can diversify their portfolio and build a stable income.
To get a better idea of whether an IRA or traditional CD is right for you, reach out to one of the investment advisors below.
Traditional IRA vs. Roth IRA CDs
Since we’re focusing specifically on IRA CDs, we won’t dive too deep into the differences between a traditional IRA and Roth IRA, but the terms of your certificate of deposit will depend on which IRA you have. Because of this, we’ll briefly go over the differences between the two.
The biggest difference between these two IRAs has to do with taxes. The money you contribute to a traditional IRA is pre-tax and grows tax-deferred. Withdrawals are taxed after you reach age 59.5.
With a Roth IRA, you contribute after-tax dollars and your money grows tax-free. You can withdraw money from a Roth IRA tax and penalty-free once you reach age 59.5. These withdrawal fees will affect how money is withdrawn from your IRA CD, which we’ll discuss in the next section.
IRA CDs vs. bank CDs (i.e. traditional CDs)
IRA CDs have a few significant differences from traditional CDs, which are also called traditional CDs. Here are three key differences between these two types of CDs.
1. Withdrawal penalties
While both bank and IRA CDs have early withdrawal penalties, the penalties are a bit different with each. Withdrawing money early from a traditional IRA CD will result in a 10% early withdrawal penalty, and you’ll have to pay taxes on the money you withdrew. The tax payment penalty doesn’t apply to Roth IRAs, but an early withdrawal penalty does.
With a traditional CD, your early withdrawal penalty is usually equivalent to three months’ worth of interest. So while you can expect a penalty for both, the amount will look different with each.
2. Deposit limits
Those under the age of 50 can deposit $6,000 into an IRA CD, while those over the age of 50 can contribute up to $7,000. This can be a bit more restrictive than traditional CDs, which generally allow you to deposit large amounts of money.
On the other hand, some CDs require a minimum deposit amount as high as $10,000. So if you don’t have that much money you want to invest, an IRA CD could be a better way to go.
3. Term lengths
The term lengths of an IRA CD are usually longer than those of a traditional CD. The term length for a traditional CD ranges between three months and five years. Meanwhile, IRA CDs generally have term lengths between three months to ten years.
To get a better idea of how different terms, deposit limits, and penalties compare, take a look at the CD accounts below.
Advantages and disadvantages of IRA CDs
Unsure if an IRA CD is right for you? Let’s break down the pros and cons of them. This list could give you a better idea if it’s something you want to invest your retirement funds into.
Here is a list of the benefits and drawbacks to consider.
- Easy to invest in. Investing can seem overwhelming to some, but it’s pretty easy and straightforward to invest in an IRA CD. So for those looking for a cheap and simple way to invest their retirement savings, an IRA CD is a good way to go.
- Guaranteed returns. In exchange for locking your money up for a time, you are guaranteed a return on your investment. This guaranteed reward, no matter how small, can be intriguing for some investors.
- Interest rates do not fluctuate. The predictability of a CD is another advantage. The rate you agree to when you open an IRA CD will be your rate the entire time. The market will not change the rates, and you will know exactly how much you will receive from your IRA CD.
- Low-risk investment. IRA CDs are a low-risk investment for a couple of reasons, but the main reason is because IRA CDs are generally backed by the Federal Deposit Insurance Corp. (FDIC). This means that up to $250,000 per deposit for each account is backed in case the bank fails.
- Limited earning potential. While the predictability and low-risk aspects of IRA CDs are definitely advantages, they also limit the amount you may earn. Rates usually fall between 1% to 2%. You could earn more from investing in stocks or bonds.
- Inflation may impact growth. Because the rates are so low, there is a chance that they won’t outpace inflation. So, while you’ll gain money from investing in a CD, the payoff may not be worth it in the end, and that money could be better invested elsewhere.
- Early withdrawal penalties. One of the biggest fallbacks of CDs is the early withdrawal penalties. If an emergency arises and you are in need of money fast, you may have to dip into your IRA CD before its maturity date, which will result in an early withdrawal penalty. Having your money locked and inaccessible may not be worth it to some.
Is an IRA CD right for me?
Due to the low return rate, an IRA CD is typically not a great option for young investors who are looking to build their retirement savings. They should also not be used by those who may need to access that money before the maturity date.
IRA CDs are best for those who:
- Are looking to diversify their portfolio;
- Have enough disposable income that they won’t have to access the money before the maturity date;
- Are close to retirement, or are already retired and built up their retirement savings account; or
- Want a secure and low-risk way to invest their IRA funds.
How to open an IRA CD
If you’ve decided that an IRA CD is the route you want to take, then talk to your bank or another financial institution. Many banks and credit unions create CDs for the specific purpose of retirement, so they can likely provide you with an IRA CD with good terms.
Some of these institutions include Bank of America, Capital One, TD Bank, CIT Bank, and Ally Bank. However, you can also talk to your current bank or credit union to see if they offer IRA CDs and what their current rates are.
What is the difference between a regular CD and an IRA CD?
The biggest differences between a regular CD and an IRA CD are the term lengths, withdrawal penalties, and deposit limits. Regular CDs generally have longer term lengths and larger deposit limits than IRA CDs. The early withdrawal penalties differ between regular CDs and IRA CDs as well, though both have those penalties.
Do you pay taxes on an IRA CD?
Traditional IRA CDs will charge tax on your interest income when you take out money at retirement. A Roth IRA CD is tax-free once you reach age 59.5 since you funded the CD with after-tax dollars.
Can you withdraw from an IRA CD?
You can withdraw money from an IRA CD, however, if you do so before age 59.5, you’ll typically incur an early withdrawal penalty.
What happens when an IRA CD matures?
Once your IRA CD reaches maturity, you can move the money out of your CD without paying an early withdrawal penalty. You can also choose to renew your CD as well.
Is it better to invest in a CD or IRA?
It depends on what your financial goals are and where you are in your career. A CD is typically recommended as a short-term savings goal or for those who want an easy way to invest their income.
How long do I have to roll over an IRA CD?
You’ll usually have up to 60 days from when you receive an IRA to roll it over to another IRA or retirement plan.
- An individual retirement account (IRA) is an investment account that helps build a retirement savings account.
- An IRA CD is when someone uses the money in their IRA to invest in a certificate of deposit.
- The biggest differences between a regular CD and an IRA CD are the withdrawal penalties, deposit limits, and term lengths.
- IRA CDs are for those who have already retired — or are close to retirement — and are looking to diversify their retirement funds.
Start planning your retirement
It’s never too early to start planning for retirement, and SuperMoney can help you no matter what stage you’re at. Whether you need to learn the basics of retirement planning or don’t know how to catch up on your contributions, we have the guides and comparison tools to help you make the best decision.
If you want a more personal approach to your retirement plan, try speaking with an investment advisor. Not only can these advisors help you plan your retirement savings, but they can also suggest what investments are best for your level of risk.
View Article Sources
- Certificates of Deposit (CDs) — U.S. Securities and Exchange Commission
- What is a certificate of deposit (CD)? — Consumer Financial Protection Bureau
- Individual Retirement Arrangements (IRAs) — IRS
- Publication 550 | Investment Income and Expenses — IRS
- What is a Certificate of Deposit (CD)? — SuperMoney
- How to Use a Real Estate Certificate of Deposit to Buy Property — SuperMoney
- CD Loan: What Is It and How Does It Work? — SuperMoney
- Money Market Account Vs. CD: Which is Better for Investing? — SuperMoney
- What Is Interest Income? — SuperMoney
- Which Investment Has the Least Liquidity? — SuperMoney
- Where Is a Savings Bond Serial Number? — SuperMoney
- Five Key Principles Of Smart Investing — SuperMoney
- How To Invest In The Stock Market: 8 Basic Concepts — SuperMoney
- Best Brokerage Apps — SuperMoney
- Beginner’s Guide to Investing — SuperMoney
- Barclays CD — SuperMoney
- CIT Bank Term CD — SuperMoney
- Bank of America Standard Term CD — SuperMoney
- Bank of America Featured CD — SuperMoney
- US Bank CD — SuperMoney
Camilla has a background in journalism and business communications. She specializes in writing complex information in understandable ways. She has written on a variety of topics including money, science, personal finance, politics, and more. Her work has been published in the HuffPost, KSL.com, Deseret News, and more.