What Is an IRA CD?

A couple gets help planning for retirement.
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DEFINITION

An IRA CD is a combination of an individual retirement account (IRA) and a certificate of deposit (CD).

Definition and Examples of an IRA CD

An IRA CD is a certificate of deposit that’s held in an individual retirement account (IRA).

  • Alternate names: CD IRA, retirement CD

The biggest benefit of an IRA CD is that you can earn a fixed interest on your retirement savings. Fixed interest means you don’t have to worry about the stock market’s unpredictability.

For example, Discover has an IRA CD with terms that range from three months to 10 years. Depending on the term you choose, you can earn an annual percentage yield (APY) of anywhere between 0.7% and 1.2%. Once you open an account, that interest rate is locked in for the term.

How an IRA CD Works

IRA CDs work much like regular CDs, but they have one major caveat: The money is specifically earmarked for retirement. Because of this, it’s subject to special IRS rules and regulations.

More specifically, IRA CDs are just like regular CDs because you:

  • Open an IRA CD with a bank or credit union
  • Choose a term that aligns with your savings goal
  • Lock in a fixed, guaranteed interest rate
  • Pay an early withdrawal penalty if you need your money before maturity
  • Can renew your IRA CD or transfer funds once it matures

On the other hand, IRA CDs are like IRAs because you:

  • Use the account to save for retirement
  • Get to enjoy the same tax benefits as a traditional or Roth IRA
  • Can’t save more than $6,000 a year (or $7,000 if you’re at least age 50)
  • May pay IRS penalties if you need your money before age 59 ½.

In most cases, you’ll pay a 10% penalty to the IRS if you withdraw money from an IRA CD before age 59 ½. However, there are certain exceptions to this rule. One exception is if your money is in a Roth IRA CD that’s at least five years old.

For example, suppose Benny is 50 years old when she opens a five-year IRA CD with Wells Fargo. She's 55 when it matures, so she’s still too young to take penalty-free withdrawals. In this case, Benny has two options if she wants to avoid breaking any IRS rules: She can either renew her IRA CD for another term, or she can roll it over into a regular IRA.

However, let’s rewind the clock for a minute and say that Benny has a five-year Roth IRA CD. When it matures at age 55, she can technically withdraw all this money without penalty because of the IRS’ exemption rule for Roth IRA accounts that are at least five years old.

It’s always important to discuss your retirement planning strategy with a financial professional or other tax professional. Even if Benny could withdraw her IRA CD money penalty-free, it may not be a good idea depending on her retirement goals.

How To Open an IRA CD

You can open an IRA CD with most banks and credit unions just like a regular CD. The process usually looks like this:

  1. Shop around for the best IRA CD rates online.
  2. Follow the steps on that bank’s website to open your account. You can usually open an IRA CD online, but some banks may want you to call or stop by in person.
  3. Fund your account.

In a regular CD, there’s typically only one way to fund your account—by transferring the money from your checking or savings account. But with an IRA CD, there are three more ways to fund your account in addition to a regular deposit:

  • Rollover: If you already have an IRA, you can move some of those funds into an IRA CD. This process is known as a rollover.
  • Transfer: A transfer happens when you move money from one IRA CD to another IRA CD at a different institution.
  • Conversion: If you want to move money from a traditional IRA or 401(k) into a Roth IRA CD, you can do that with a conversion. But be warned: 401(k)s and IRAs have different tax treatments, so some special rules may apply.

Types of IRA CDs

Just as there are multiple types of IRAs, there are also multiple types of IRA CDs.

Traditional IRA CD

A traditional IRA CD works much like a traditional IRA. You fund your account with pretax dollars and watch your earnings grow tax-deferred until retirement. You can start taking penalty-free withdrawals once you turn age 59 ½.

Traditional IRA CDs are subject to required minimum distributions (RMDs). Once you reach age 72, you’ll have to start taking distributions even if you don’t need them.

Roth IRA CD

With a Roth IRA CD, you fund your account with after-tax dollars. You then can sit back and relax as your deposit grows tax-free. One feature of Roth IRA CDs is that you can withdraw your contributions at any time. You can also withdraw your earnings as long as your account is at least five years old and you’re at least age 59 ½.

SEP IRA CD

Although not as common, some banks offer SEP IRA CDs for self-employed individuals. Similar to a traditional IRA CD, you won’t pay any taxes until you take withdrawals, and RMDs kick in at age 72.

Pros and Cons of an IRA CD

Pros
  • Tax benefits of an IRA

  • Guaranteed returns

  • Low risk

  • Good option for soon-to-be-retirees

Cons
  • Lower yields

  • Two types of early withdrawal penalties apply

  • A minimum opening deposit is often required

  • May not be ideal if you’re decades away from retirement

Pros Explained

  • Tax benefits of an IRA: IRA CDs have all the same tax benefits as an IRA. So if you go with a Roth option, you can pay your taxes upfront and your money will grow tax-free. If you go with a traditional IRA CD, you can defer taxes now and pay them once you retire.
  • Guaranteed returns: The most significant benefit of an IRA CD is that you earn a fixed interest rate on your money, so you don’t have to worry about your account losing value right as you retire. For example, if you open a 15-month Synchrony Bank IRA CD earning 0.9% APY, you’ll earn that rate for the life of your term.
  • Low risk: IRA CDs are insured by the Federal Depository Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which means your initial deposit stays intact and is never at risk of losing value.
  • Good option for soon-to-be retirees: Guaranteed returns and FDIC insurance make IRA CDs a good option for current and soon-to-be retirees. However, you’d give up the potentially higher returns you’d earn with a regular IRA.

Cons Explained

  • Lower yields: The biggest downside to IRA CDs is that you limit your earnings potential. In most cases, a regular IRA made up of stocks, bonds, ETFs, and mutual funds will earn a higher return over time.
  • Two types of early withdrawal penalties apply: IRA CDs are a double whammy when it comes to withdrawal penalties. If you need your money early, the bank may charge you an early withdrawal fee, and the IRS may make you pay taxes and penalty fees if you’re younger than age 59 ½.
  • A minimum opening deposit is often required: Most banks have opening deposit requirements for IRA CDs. By contrast, you can open an IRA at some brokerages with as little as $0.
  • May miss out on higher returns if CD rates increase: If you open an IRA CD and rates start to rise, you’re out of luck unless you go with a bump-up or step-up CD, which lets you raise your rate at least once during your CD term.
  • May not be ideal if you’re decades away from retirement: Because returns are historically lower for IRA CDs than regular IRAs, they’re generally not recommended if you’re more than 10 years away from retirement and have plenty of time to rebound from stock market volatility.

IRA CD vs. Regular CD

IRA CD Regular CD
Used to save for retirement Used to save for any short- or long-term goal
Subject to early withdrawal penalties and IRS regulations Subject to early withdrawal penalties only
Can be opened at most banks and credit unions Can be opened at most banks and credit unions
Has a fixed interest rate Has a fixed interest rate

IRA CDs and regular CDs have a lot in common: They’re both offered by banks and credit unions; they both earn predictable interest rates that don’t change; and they can both come in terms ranging from three months to 10 years.

So, what’s the difference between an IRA CD and a regular CD?

The main difference is what they’re used for and how they’re taxed. Regular CDs can be used for anything, including a down payment on a house, a new car, your kids’ future, or any lifestyle goals you want to achieve. IRA CDs are used for retirement.

There are also no tax advantages with a regular CD. With an IRA CD, you either get a tax break now if you go with a traditional IRA CD, or in retirement if you go with a Roth IRA CD. 

IRA CD vs. Roth IRA

IRA CD Roth IRA
Earns a fixed interest rate Returns are unpredictable and subject to stock market volatility
Returns are typically lower than a Roth IRA Returns generally are higher than an IRA CD
FDIC-insured; can’t lose value SIPC-insured; can lose value
Offered by banks and credit unions Offered by brokerage firms
Made up of CDs only Made up of almost any asset, including stocks, bonds, ETFs, mutual funds, and more
Tax-advantaged Tax-advantaged

Both IRA CDs and Roth IRAs help you reach retirement goals. Both also come with tax advantages such as the ability to earn tax-free growth and withdrawals in retirement. But that’s about where the differences stop.

An IRA CD is considered a conservative investment because it’s FDIC-insured by a bank and has a predictable interest rate. This can be a great option if you’re close to retirement and don’t want stock market volatility messing with your returns. You still get the same tax benefits as an IRA, but with a locked-in interest rate and FDIC insurance.

The same contribution limits that apply to traditional and Roth IRAs also apply to IRA CDs. So you can’t contribute more than $6,000 a year if you’re under age 50 or more than $7,000 if you’re age 50 and older.

Here’s the catch, though: You’ll earn a lower rate of return than you would if you invested that money into a Roth IRA. For this reason, IRA CDs typically are best for those nearing retirement, whereas younger individuals who still have decades to save may be better off with a Roth IRA.

On the flip side, Roth IRAs can be made up of any security imaginable, from stocks and bonds to ETFs and mutual funds. Returns aren’t guaranteed in a Roth IRA, but this means your portfolio has the potential to earn much more than you could if you only had IRA CDs.

Key Takeaways

  • An IRA CD combines an individual retirement account (IRA) and a certificate of deposit (CD).
  • IRA CDs typically have a set term, such as six months to five years, and a fixed interest rate. You can either withdraw your funds or renew the CD for another term when the term expires.
  • IRA CDs are best for individuals in or near retirement looking to add stability and predictable returns to their retirement portfolios.

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