If you’re nearing or in retirement, you likely want to avoid investing your money in the volatile stock market. But there’s still a way to safely park your retirement savings while earning interest: IRA CDs.
An IRA CD combines the benefits of an individual retirement account (IRA) and a certificate of deposit (CD).
Understanding the basics of an IRA CD
An IRA is a tax-advantaged retirement savings account that allows your money to grow tax-free or tax-deferred, depending on whether the account is a traditional IRA or Roth IRA. With a traditional IRA, you pay taxes on any withdrawals. With a Roth IRA, you don’t pay taxes on money you withdraw in retirement.
An IRA CD is an IRA that you use to put retirement savings specifically into CDs, which are savings accounts offered by banks and credit unions that require you to keep your money locked up with that institution for a set period of time in exchange for a fixed interest rate.
The difference between an IRA and an IRA CD
You can fund IRAs with a variety of assets, including stocks, bonds and mutual funds. But with an IRA CD, the money only goes into CDs.
While CDs offer predictable growth and low risk, it’s critical to consider your long-term goals, time horizon and risk tolerance, said Brian Snerson, managing director at Essex Wealth Management, a financial planning firm.
How to open an IRA CD
You can open an IRA CD with banks or brokerage firms. Credit unions offer a similar product called an IRA share certificate.
Once you’ve determined where you want to open your accounts — and whether you want to open an IRA CD or Roth IRA CD — you’ll need to provide necessary documents to the institution, such as your Social Security number.
Then, you can fund your IRA CD by making a new contribution or via a transfer or rollover once the term of your CD ends.
The benefits of investing in an IRA CD
The benefits of an IRA CD is that CDs are considered lower risk and are typically insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 in the event that a bank fails, Snerson said. They also have a guaranteed return with no brokerage fees.
“They are helpful as a retirement planning tool because of their short term, predictable make-up,” Snerson said, adding that they can be useful if you have specific cash needs.
Potential risks of an IRA CD
The risk of an IRA CD is that it may be too conservative for those not yet in retirement or in early retirement, since there is no potential for growth beyond the fixed rate, Snerson said.
The yield environment could also change, so you could miss out on higher returns if rates move higher while the CD is invested, he added.
Keep in mind that IRA contributions also apply to IRA CDs: Contributions are limited to $6,500 in 2023 if you’re under age 50 and $7,500 if you’re 50 or older. In 2024, contribution limits increase to $7,000 and $8,000, respectively.
Because IRA CDs are through an IRA, there are penalties for early withdrawals, too.
Interest rates and maturity terms for IRA CDs
Interest rates on CDs are fixed, meaning that the bank cannot change the rate it pays you during the lifetime of the CD, even if the Federal Reserve lowers interest rates.
Maturity terms for CDs vary and are usually between three months and five years.
Tax implications of an IRA CD
Because IRA CDs are a type of IRA, they are subject to IRA tax rules.
While the money you invest in a traditional IRA isn’t taxed until you make withdrawals in retirement, Roth IRA withdrawals are tax-free because they are funded with after-tax dollars. With an IRA CD, you’ll also defer taxes until you withdraw. But with a Roth IRA CD, you’ll buy CDs via your Roth IRA with money that has already been taxed, and make tax-free withdrawals.
IRA CD vs. traditional savings account
IRA CDs allow you to put your retirement savings in CDs, which tend to have higher interest rates than traditional savings accounts.
However, unlike traditional savings accounts — which you can withdraw from at any time — CDs require you to keep your money locked up for a certain amount of time. Investments in IRAs also come with added withdrawal rules from the IRS.
Withdrawing from an IRA CD
When you withdraw money from a CD before the CD term is up, you’ll face penalties. However, you also have to follow the withdrawal rules for IRAs to avoid penalties. Contributions and earnings you withdraw from a traditional IRA are taxed as ordinary income and charged a 10% penalty if you are under the age of 59 1/2, though there are exceptions to the penalties outlined by the IRS. You can make withdrawals from traditional IRAs without penalties once you hit age 59 1/2, but you’ll still owe taxes.
With Roth IRAs, you may have to pay taxes and penalties on earnings, but not contributions, if you make the withdrawal before age 59 1/2 or if you haven’t had the account for at least five years. Roth IRA owners over the age of 59 1/2 who haven’t had the account for five years have to pay taxes, but not penalties, on earnings, while those who have had the account for more than five years can withdraw without penalties or taxes.
Retirement savers with traditional IRAs also have to take required minimum distributions (RMDs) when they hit age 73. Roth IRAs don’t have RMDs unless you inherited the Roth IRA instead of opening it yourself.
Rollovers and transfers with IRA CDs
In addition to making contributions to an IRA CD, you can fund your account via a transfer or indirect rollover.
An IRA transfer involves moving an IRA from one institution to another, while an indirect rollover refers to moving funds from one type of retirement account, like a 401(k), to another.
The IRS has specific rules around transfers and rollovers, including that you can’t roll funds from a Roth IRA into a traditional IRA.
Frequently asked questions (FAQs)
IRA CDsare considered relatively safe investments. Your money doesn’t face the same risk of loss that it might in the stock market. Plus, CDs from federally insured banks and credit unions are insured up to $250,000 by the FDIC or National Credit Union Administration (NCUA).
Use the FDIC’s BankFind tool or the NCUA’s Credit Union Locator to check if a bank or credit union is insured.
If you don’t make any changes to your IRA CD when it matures, it will likely be automatically renewed for the same term.
You typically cannot add money to an IRA CD after an initial deposit.
Yes, as long as the bank is FDIC-insured, your money is protected up to $250,000.
Yes, but you must stay within the IRA contribution limits.
