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- An IRA certificate of deposit offers safety and predictable growth on savings.
- Traditional, Roth, and SEP IRA CDs follow the same guidelines and restrictions as any other IRA.
- IRA CDs could be a worthwhile option if you're nearing retirement and looking for a safe investment.
- See Business Insider's list of the best CD rates»
You're probably familiar with an individual retirement account (IRA), a tax-advantaged investment account that helps you save for retirement. You also may have heard of a certificate of deposit (CD), a savings account that locks in your Annual Percentage Yield (APY) for a set amount of time.
An IRA CD is a type of account that combines these two concepts, providing safety of returns and tax benefits.
What is an IRA CD?
An IRA CD locks in your APY for a set amount of time and saves your money specifically for retirement. It can be an option worth considering for people who are getting close to retirement and are looking for a safe way to invest their money, but it does come with some limitations.
IRA CD vs. regular CD
The major differences between IRA CDs and regular CDs have to do with taxes and withdrawal rules.
When you open a regular CD, you're putting away money for the short or medium term and earning a steady rate of return. All interest payments are taxed as income in the year you collect them and you get your initial deposit back when the CD matures.
With an IRA CD, your CD is part of your long-term retirement savings strategy — as such, your interest earnings are tax-deferred or tax-exempt, depending on the type of IRA you open, and you don't have access to your initial deposit until age 59 1/2.
Types of IRAs
Most banks allow you to choose between a traditional and Roth IRA CD, and some offer SEP IRAs for people who are self-employed. An IRA CD follows most of the same rules as any other IRA. You're limited to a certain amount in contributions per year, and you'll pay the usual taxes and penalties for early withdrawals that you would with any other traditional, Roth, or SEP IRA.
This means you'll contribute after-tax dollars to a Roth IRA CD, and you won't pay taxes when you withdraw money. For a traditional IRA CD and SEP IRA CD, you'll typically contribute money before taxes are taken out, then pay income tax on withdrawals.
Benefits of investing in IRA CDs
Safety and security
There's no risk of losing your initial deposit with an IRA CD. Also, like regular IRAs, IRA CDs are federally insured up to $250,000 per depositor, per institution as long as you open one with an FDIC-insured bank or NCUA-insured credit union. This means your money is safe in the unlikely event the financial institution goes under.
Guaranteed returns
IRA CDs have a fixed rate of return for a specified period of time, making them a solid option if you're looking for predictable growth. They tend to offer higher APYs than regular bank CDs, but your access to your money is limited, even when the CD matures.
Tax advantages
There are varying tax advantages to investing in IRA CDs, depending on the type of IRA you open.
With a traditional IRA CD, your contributions may be tax-deductible and your interest earnings may be tax-deferred (income limits apply). Interest payments are reinvested in your CD and you'll only pay taxes when you withdraw money from the account in retirement.
Conversely, contributions to a Roth IRA CD are not tax deductible, but the interest earnings are tax-free when withdrawn in retirement.
Drawbacks of IRA CDs
Lower potential returns
The risk-reward tradeoff for IRA CDs is low. While you're guaranteed to preserve your initial investment, plus earn a steady rate of return, you miss out on the potential of higher returns in other investments, such as stocks, bonds, or real estate.
Limited liquidity
Most types of CDs limit your access to your money. If you want to do a partial or full withdrawal before the CD matures, you'll have to forfeit some of the earned interest. The same is true of IRA CDs, with a twist.
You'll pay the bank's early withdrawal penalties if you take out funds before the IRA CD matures. You'll pay the usual 10% fee if you withdraw from an IRA before age 59 1/2. And if you withdraw before the IRA CD matures and before you turn 59 1/2, you'll pay both penalties.
Inflation risk
While fixed interest rates are often considered a benefit of CDs, they can pose a problem for long-term investors seeking a way to keep up with inflation.
Contribution limits
You're limited to how much you can contribute to an IRA annually. In 2024, the aggregate total you can contribute to all IRA accounts, including IRA CDs, is $7,000 for those under age 50 and $8,000 for those 50 and older.
If you're looking to set aside a higher amount, consider a regular bank CD or a brokered CD.
How to choose the best IRA CD
When it comes to choosing an IRA CD, be sure to consider the following:
- The reputation of the financial institution
- APY
- CD term length
- Minimum deposit requirements
- Early withdrawal penalty
- Maintenance or service fees
Don't assume that just because a bank offers a CD, it also has IRA CDs — it isn't all that common. Currently, some of the best IRA CD rates can be found at Discover Bank, Synchrony Bank, and Alliant Credit Union.
Who should consider an IRA CD?
If you're retiring in the next few years — or you're already retired and looking for a way to preserve capital — an IRA CD can be a less risky option for investing. You will earn a guaranteed return, though it may not be as much as you would earn investing in a riskier asset, like stocks or bonds.
If you have a significant number of years left to invest before retirement, you'll likely want to take on more investing risk than an IRA CD can provide.
Alternatives to IRA CDs
Stocks and bonds
If you're comfortable risking some of your savings and you're not within a few years of retiring, stocks and even bonds offer higher return potential than IRA CDs. The average stock market return over the last decade was 12.39%. Currently, the top 10-year IRA CD rate is around 4%.
Mutual funds and ETFs
Mutual funds offer a way for investors to spread out risk by diversifying their holdings among several different stocks and/or bonds. They can be purchased within a brokerage account and are usually professionally managed for a fee, which can eat into your profit.
ETFs are baskets of securities that you can invest in through brokerage firms or robo-advisors. Typically, they are passively managed, which cuts operating expenses and keeps more of your return in your pocket.
Annuities
A hybrid between an investment product and insurance contract, an annuity is a way for retirees to guarantee income for a certain period of time or the remainder of their life. Annuities come in many varieties and are generally categorized by risk level and how your money is invested.
IRA CD FAQs
Are IRA CDs a good investment?
IRA CDs may be a good investment for risk-averse investors or retirees who are seeking safety and predictability. They are best utilized as part of a larger investment strategy.
What are the contribution limits for IRA CDs?
In 2024, you can contribute up to $7,000 to all IRAs you own, including IRA CDs, or $8,000 if you're over age 50.
Can I withdraw money from my IRA CD early?
Yes, but the penalties may be steep, depending on your age and the type of IRA you have. Generally, if you're under age 59 1/2 you will also owe income taxes on an early withdrawal.
Personal Finance Reviews Editor
Laura Grace Tarpley (she/her) is an expert in mortgage rates, refinance rates, lenders, bank accounts, and borrowing and savings tips for Personal Finance Insider. She worked on Business Insider's "The Road to Home" series, which won a Silver award from the National Associate of Real Estate Editors.She has written about personal finance for over seven years. Before joining the Business Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU.
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