What is an IRA CD?

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If you’re looking ahead to the golden years of not working, you’re likely thinking about a big question: How do you get enough money to feel comfortable in retirement? There are a range of potential answers, including an IRA CD. Here’s what you need to know.

What is an IRA CD and how does it work?

An IRA CD is an individual retirement account (IRA) full of certificates of deposit (CDs). Banks, credit unions and brokerage firms offer them.

There are two options for IRAs: a traditional IRA or a Roth IRA. The main difference between these IRA accounts is when you benefit on your tax filings – either when you deposit the money in the IRA or when you withdraw the money in retirement. You can choose to put the funds in an IRA account toward a range of investments. With an IRA CD, the money is invested in CDs. You deposit money in the IRA account, and then, the cash is parked in CD investments.

CD vs. IRA CD

What’s the difference between a regular CD and an IRA CD? There are two key nuances.

How much you can invest: With a traditional CD, you can deposit as much as you want. IRA CDs, though, have contribution restrictions based on your age, your tax filing status and your annual income. For example, if you’re older than age 50, you cannot contribute more than $7,000 to an IRA in 2021. You can, however, allocate previous contributions in the IRA to a new CD.

How much you will pay if you need the funds early: Most CDs have early withdrawal penalties. If you decide to take the money out before the CD reaches maturity, you’ll have to pay a percentage of the interest you have earned from the account.

An IRA CD, meanwhile, has another factor to consider. If you withdraw the money before the qualifying retirement age in your IRA CD, you have to pay a penalty fee and there are also tax implications.

Which type of CD is better:

If you’re comparing traditional CDs and IRA CDs, it’s important to note that the current market for CDs leaves very little room for growth.

Casey T. Smith, president of Georgia-based Wiser Wealth Management, says that IRA CDs really serve little purpose for the client. “Risk would have to be zero tolerance of principal loss and the age would have to be in their 80s,” Smith says.

If you’re not in your 80s but still looking for a safe, fixed-rate option for your money, a traditional CD can offer some nominal earning potential. It would be wise to consider some alternative CDs, too. Some banks and brokerages offer a number of different types of CDs that can be more appealing with added flexibility. For example, Ally Bank’s no-penalty CD pays a slightly lower APY than on its standard high-yield CD – but without the worry of paying any fees if you opt to withdraw your funds.

Pros and cons of IRA CD

Anytime you’re considering putting your money somewhere, you need to weigh the potential ups and downs, and an IRA CD is no different. Here’s a look at the main pros and cons of opening an IRA CD.

Pros Cons
Peace of mind Severely limited earning potential
Low retirement fees Rising rates

Pros

Peace of mind: Investing can be scary, particularly if you struggle to shrug off the seasick feeling of watching the stock market swing. CDs are fixed-rate investments, so you can have a firm calculation of your CD earnings in advance. Elliot Pepper, CPA, CFP, co-founder of Maryland-based Northbrook Financial, says that the primary perk of an IRA CD is the ability to avoid losing your money while earning a steady stream of payments.

“Essentially, a CD provides a steady stream of fixed and known interest payments over the CD term and your principal balance is typically protected, often through FDIC insurance,” Pepper says.

Low fees: IRA CDs are a do-it-yourself retirement approach, which means you won’t need to pay much in the way of extra fees for making stock trades or having someone manage your portfolio.

Cons

Severely limited earning potential: Whether you’re planning for retirement or you’re nearly ready to hang up the work attire, you need your money to grow. Unfortunately, an IRA CD isn’t going to help you accomplish that right now. Even the best IRA CD rates struggle to top the 1-percent mark.

“There is a trade off in the safety and security of a CD investment and the ability to earn a potentially higher return in other investments that might be more risky,” Pepper says.

Rising rates: With interest rates so low, there is nowhere to go but up. If you’re stuck in a five-year CD, you’ll either be on the sidelines watching other CDs pay more, or you’ll be paying early withdrawal penalties to chase higher earning power.

“There is also interest rate risk in that a CD typically carries a fixed interest rate throughout its term,” Pepper says, “so if rates were to rise over the term of the CD, the investment would not be as attractive since it would be stuck paying the relatively lower rate.”

How to open and find the best IRA CDs

Opening an IRA CD is simple. Banks and credit unions offer IRA CD options but you will want to consider multiple options. The best IRA CDs will likely not be found at the biggest banks, either. For example, Wells Fargo’s current retirement CD rates top out at 0.01 percent with a bonus interest rate of 0.02 percent. Use Bankrate’s guide to the best IRA CD rates to compare earning potential, account opening requirements and more.

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Banking editor