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Saving For Retirement With CDs: Is It Worth It?

Last updated 03/15/2024 by

Lacey Stark

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If you’re young to middle-aged, saving for retirement with CDs is probably not your best option. Certificates of deposit are a low-risk investment, but they also typically have low returns. Most people accruing retirement savings need to maximize their investment returns in order to meet their retirement goals. However, there can be a few instances where adding CDs to your investment portfolio might make sense.
Unless you’re independently wealthy, one of your biggest financial goals is probably saving for your retirement. After all, most people probably don’t want to work forever! But how you go about accumulating retirement savings is very personal and depends on several factors.
Some of the things to consider are your age, income level, how much money you already have, and your degree of risk tolerance. This article discusses how to save for your retirement with CDs and if that strategy makes sense for you. The short answer is that CDs can be a sensible addition to a well-balanced retirement savings portfolio, but they should definitely not be the main asset in your portfolio. First, let’s take a quick look at the different types of certificates of deposit.

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Who shouldn’t invest in CDs for retirement

Basically, if you’re relatively young and decades away from your retirement years, the minimal interest earned when CDs mature won’t be enough to get by. In this case, you should consider riskier investments that can add to your savings more quickly.
As previously mentioned, the way you choose to save for your later years is a personal choice. However, your age, time horizon, and other factors should help you determine the financial tools you choose to use. A certificate of deposit is simply not an ideal tool to grow your wealth because CD rates are so low.
Most investment professionals would advise that this is the time to put your money into a higher-risk investment where you can realize much bigger returns. The goal is to sock away enough money to live out the rest of your life very comfortably. Better ways to meet your goals are through investments in stocks, bonds, real estate, and other investment opportunities.
If you need more specific advice on how you should start saving for retirement, try speaking with one of the investment advisors below.

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Tax implications of CDs for retirement savings

You should first discuss the exact tax consequences of certificates of deposit with a financial advisor before investing in CDs. However, there are a few things you should know upfront about saving for retirement with CDs.
For one thing, if you invest money in a regular or liquid CD through traditional financial institutions, like banks or credit unions, you’ll pay taxes on the interest as though it’s regular income. That means you could be taxed as high as 37%, depending on your tax bracket.
Taxes are a bit different if you’re holding your CD in a retirement account and vary based on the type of retirement account you have. For example, if you have a tax-deferred account such as a traditional IRA, your contributions may be tax deductible if you meet certain income requirements. This includes CDs, stocks, or other investments. However, you’ll start paying taxes as you begin to withdraw the money during your retirement years.
If you have a Roth IRA instead, the money you deposit is not tax deductible because you’ve already paid taxes on the money earned before you contributed. Because of this, when you begin to make withdrawals, you won’t have to pay taxes on what you’ve earned if you reached retirement age.

Who should invest in CDs for retirement

Having said that, there are times when it might make sense to invest in CDs as part of your retirement planning. It’s a savings vehicle where you can feel confident that your money is going to earn interest at a guaranteed rate with a guaranteed return.
People who might take advantage of this option are those who are already retired or nearing retirement age, for example. This is not the time to go for a high-risk investment when you need that money for the near future. In that case, a CD can be a good way to preserve capital and still earn some interest.
Others who might be interested in a CD over other investments are those with a low risk tolerance. In addition, someone who wants to earn at least some interest income while avoiding temporary stock market volatility is another good candidate.

What is the best savings plan for retirement?

In general, the best way to strategize your retirement planning is to go for investments that are high return — which means higher risk — when you’re young. This will allow you to maximize your returns and build up your retirement savings before you ever need to touch it.
Then, as you gradually get older, start to move into investments with more moderate risks until you get closer to retiring. At that point, you should be looking into more conservative investments — like CDs perhaps — so as to preserve capital and not lose money right when you’re about to need it the most.
If you don’t feel qualified to actively manage your accounts, many brokerage firms and other financial institutions have various investment plans they can help you implement at different stages of your life.

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Types of CD accounts

If you want to put a portion of your money into something with a better interest rate than a typical savings account or money market account, certificates of deposit are a viable option. At a minimum, they’re safe and come with a fixed interest rate, so you can calculate exactly how much you will earn after the CD matures.

Traditional CD

These are the types of CDs you can expect to find at your local banks, credit unions, or other financial institutions. They come with fixed interest rates and are not meant to be touched until their maturity date — with terms ranging from approximately three months to ten years. At the end of the term, you collect your initial investment, plus interest. If you choose to withdraw the money before maturity, you’ll have to pay early withdrawal penalties which may negate any interest you’ve made thus far.
That being said, if you know you can patiently wait until the maturity date, CDs can be a great investment option. Take a look at some of the CD accounts below to start.

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IMPORTANT! Not all certificates of deposit are backed by the Federal Deposit Insurance Corporation, which means they aren’t as secure as others. Be sure the CDs you invest in are FDIC-insured.

No-penalty CDs

Also known as liquid CDs, no-penalty CDs allow early withdrawals without penalties. Other than that, they work much like regular CDs. The main drawback of this type of CD is that the interest rates are typically even lower than usual. For context, compare the accounts below to other CD rates, as those below do not charge early withdrawal penalties.

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Step-up CD

Unlike a regular CD, a step-up CD comes with periodic rate adjustments, where you automatically receive a boost in your interest rate a couple times a year. The idea is that the longer you leave your money in the CD, the higher your interest rate.
But, it’s important to note that this type of CD usually starts at a lower rate and even as your rates rise, the overall average annual percentage yield (APY) after the term is up is still usually less than a traditional CD. You’ll also still be hit with early withdrawal fees if you take the money out before the CD matures.

Bump-up CDs

A bump-up CD is sometimes confused with a step-up CD, but it’s actually a very different investment product. Bump-up CDs also give you the opportunity to raise your interest rate, but it’s not automatic.
Instead, you need to request it, and usually only once within the term. The advantage over a step-up CD is that you can more strategically plan your increase, depending on how the market is going.


Traditional IRA CDs are simply normal CDs that you hold in your individual retirement account. The benefit of a traditional IRA CD is that you will receive certain tax advantages over other CDs, including tax deferral until you start making withdrawals from the account.
Included in this category are Roth IRA CDs. The difference between a Roth IRA CD and a regular IRA CD is just that a Roth IRA is another type of individual retirement account with different tax consequences (more on that, below).

Jumbo CDs

A jumbo CD works just like a regular one but the minimum requirement is much higher. For example, you might need as much as $100,000 to open a CD account for a jumbo certificate of deposit. That being said, you’ll probably get a higher interest rate.
These kinds of CDs might be good for someone who, for example, recently got an inheritance and is wary of higher-risk investments. This way you can park the money somewhere safe and know that you won’t lose money on the investment.

CD ladder

CD ladders aren’t actually a different kind of CD but instead more of a savings strategy. Laddering means buying multiple CDs with staggered maturity dates.
Usually, the longer the term, the better the rate you can get. With that in mind, you can buy a six-month, one-year, two-year, and three-year CD, thus creating a ladder of increasing rates. This allows you to take advantage of higher interest on the longer terms while still keeping some of your funds more liquid.


What is the disadvantage of a CD account?

The primary drawback of a CD account is that, because of the (typically) low fixed interest rate, you run the chance of losing purchasing power with your money. This is because inflation rates could outpace the interest you’re earning, particularly if you purchase long-term CDs. For that reason, if you decide to add CDs to your portfolio, consider ones with shorter terms that will give you more flexibility.

How safe are CDs?

As long as CD accounts are held by banks insured by the Federal Deposit Insurance Corporation (FDIC) or credit unions insured by the National Credit Union Administration (NCUA), your money is guaranteed up to $250,000 no matter what happens to the financial institution you purchased from.

Key Takeaways

  • CDs are not an ideal vehicle for retirement planning, especially if you’re relatively young and have more time to put your money toward more lucrative investments.
  • If you’re older and closer to retiring, CDs can be a good way to preserve capital and earn interest while avoiding stock market volatility.
  • Talk to a financial professional and consider the tax consequences of where and how you purchase CDs.
  • Because you typically have to wait until a CD matures before withdrawing the money (without incurring penalties), consider shorter terms rather than long-term CDs.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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