What Is an IRA CD?

CDs Are a Low-Risk Way to Invest Retirement Funds

Image shows a pros cons list. Text reads: "Pros and cons of CD IRAs: Pros: It's a safe bet for conservative investors–there's usually a government guarantee. It's ideal for safe money or near-term spending. Cons: you only earn slightly more than you'd get from a savings account. It's not ideal or long-term investing"

Image by Theresa Chiechi © The Balance 2019 

A CD IRA is a combination of two things: a certificate of deposit (CD) and an individual retirement account (IRA). You can use the two of them together, or you can use either one of them separately. For example, you might open an IRA that doesn’t offer CDs as an investment, or you can hold certificates of deposit that aren’t part of your retirement accounts.

Certificates of Deposit

CDs are safe investments when purchased through federally-insured banks and credit unions. They pay interest on your cash, and they often pay more than you can earn in a standard savings account.

When you open a CD, you commit to leaving your money untouched in that account for a certain amount of time, such as 18 months, two years, five years, or more. In exchange for that commitment, your bank pays a higher interest rate.

You can often withdraw your funds from a CD before the term ends, known as the maturity date, but you will typically be charged an early withdrawal penalty for doing so. However, some CDs are liquid CDs, allowing you to pull out some or all of your money early without any penalty.

Some long-term, high-yield CDs have a call feature, which means that the issuing bank can choose to terminate, or "call," the CD after some specified period of time. The call date of a CD is different than its maturity date.

CDs are a straightforward investment: you choose the timeframe and know exactly how much you’ll earn. You can also try advanced strategies like CD ladders to address changes in interest rates and the potential need for available cash.

You can buy CDs from almost any bank or credit union, as well as many brokerage firms.

Individual Retirement Accounts

Individual retirement accounts, or IRAs, are a type of account designed for retirement savings. They offer certain tax benefits. Depending on your income and the type of IRA you open:

  • Contributions might be tax-deductible.
  • You may be able to shield interest earnings in the account from current taxes or growth could be tax-free.

The type of tax benefit you get depends on whether you have a Traditional or Roth IRA.

  • Traditional IRAs: Contributions are deductible from your taxable income. Later, in retirement, you typically have to pay income tax on your withdrawals.
  • Roth IRAs: Your contributions are not deductible. However, you can usually withdraw your money without any further tax liability when you take distributions during retirement.

No matter which type of IRA you have, you will usually pay tax penalties if you withdraw funds before retirement. You may also have to pay additional tax on distributions if you failed to withhold sufficient taxes earlier.

If you withdraw funds from an IRA CD before the CD's maturity date, there might not be any penalty from the bank. However, you might have to pay income taxes or various penalties to the IRS as a result of taking IRA distributions.

Using CDs Inside of an IRA

An IRA is a type of account that allows you to use many different types of investments. CDs are one option. You can own certificates of deposit outside of your retirement accounts as well.

Depending on where you have your IRA, CDs might or might not be an option. For example, some brokerage accounts don’t offer CDs. Conversely, CDs might be the only option if you open your IRA with a bank or credit union.

Pros and Cons of CD IRAs

A CD IRA is a retirement account that you invest in CDs. Like any investing choice, it has both advantages and drawbacks.

  • Pro: government-protected investment. If you’re a conservative investor who wants to avoid the stock market, investing in an IRA CD from a bank is a good way to protect your money. Banks are FDIC insured, so you receive a government guarantee that you won’t lose money in that account.
  • Pro: guaranteed returns. With your IRA invested in CDs, you get guaranteed returns at a higher rate than you’d get from a savings account. This is good for investors who are later in their careers or closer to retirement.
  • Con: locked into an interest rate. You may lock your money in a CD at a given rate only to see rates rise higher. In those cases, a bump-up CD can allow you to request a higher rate.
  • Con: better long-term investment options available. Any interest you earn is helpful, but it might not be enough to help you outpace inflation over the long term. If you are still far away from retirement and able to take more risks, other types of investments may offer higher potential returns.

Using CDs as part of your retirement savings isn’t a black-or-white choice. You can own certificates of deposit along with other types of investments. Depending on your financial situation, how comfortable you are with risk, and how close you are to retirement, CDs may work well for your retirement savings or as a cash bucket for the near future.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. Investor.gov. "Certificates of Deposit (CDs)." Accessed Apr. 12, 2020.

  2. Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?" Accessed Apr. 12, 2020.

  3. Securities and Exchange Commission. "High-Yield CDs: Protect Your Money by Checking the Fine Print." Accessed Apr. 12, 2020.

  4. Internal Revenue Service. "Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs): What Are Some Tax Advantages of an IRA?" Accessed Apr. 12, 2020.

  5. Internal Revenue Service. "Traditional and Roth IRAs." Accessed Apr. 12, 2020.

  6. Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs): When Can You Withdraw or Use Assets?" Accessed Apr. 12, 2020.

  7. Ally Bank. "IRA High Yield Certificate of Deposit (CD)." Accessed Apr. 12, 2020.

  8. Discover. "IRA Certificate of Deposit." Accessed Apr. 12, 2020.