What an IRA CD Is, Rates and How It Works (2024)

What an IRA CD Is, Rates and How It Works (1)

Saving for retirement is important for people of all ages, with a 401(k) being a particularly popular option. However, this standard account type may not always be enough. That’s where an individual retirement account, or IRA, comes in. IRAs let you save for retirement without going through your employer. Furthermore, an IRA CD lets you lock in a CD-style interest rate in the form of a term-based retirement account. IRAs, 401(k)s and IRA CDs are three options to save for retirement, but there are many other possibilities on the market. You can speak with a financial advisor to learn more about how this investment could benefit your own retirement plan.

What Is an IRA CD?

An IRA CD is simply an IRA where all the money is invested in certificates of deposit (CDs). To understand what that means, let’s look at the two types of bank accountsthat an IRA CD combines:an IRA and a CD.

A CD is an account that typically offers a higher interest rate thana savings or checking account. However, your money is tied up in the CD for apredetermined length of time, known as the CD’s term. If you withdraw money before the end of the term, you will likely pay considerable penalties. A CD term could be as short as three months or as long as 10 years. The longer the term, the higher the interest rate usually is.

An IRA is a tax-advantaged retirement account that allows you to save and invest your money in a number of different ways. The IRA itself is not an investment. It’s more like a home for your investments. Many people use IRA funds to invest in stocks and bonds, but you could also put it into money market accounts or CDs.Regardless ofwhich type of IRA you have or how you allocate IRA funds, the advantage is that you don’t pay tax on your money as it grows. You pay tax before you contribute to the account or after you withdraw from the account, depending on the type of IRA you have.

So if you wanted to, and assuming your bank allows it, you could invest some of your IRA funds in stocks, some in bonds, put some in a money market account and then put some in CDs. If you wanted to put all of the funds in CDs, you would have an IRA CD.

Pros of Using an IRA CD

Now that you understand what an IRA CD is and how one works, let’s see if it’s the right choice for you. Here are a few pros to consider:

  • IRA CDs are a secure way to invest your money.So long as you open an IRA CD with anFDIC-insured institution,your savings are insured for up to $250,000. Even if your financial institution fails, you’re protected up to that amount. This is not the case for other investments like stocks or bonds.
  • CD interest rates don’t fluctuate with the market. The rate you agree to when you open the CD is the rate you’ll get. That predictabilitycan help you plan your retirement savings because you know exactly how much you’ll earn from a CD.
  • A CD is a straightforward investment tool. There isn’t a lot to consider when choosing one and it isn’t likelyto make adjustments throughout its life. Investing in an IRA CD is easier and less time-consuming than designing and managing your owninvestment portfolio.
  • CDs don’t have fees. Most investments areusuallysubject to management fees. Depending on how you invest, you may have to pay brokerage fees and expense ratios. Fees eat into your retirement savings and may only make it harder for you to reach your goals. With a CD, you won’t have thosefees.

Cons of Using an IRA CD

What an IRA CD Is, Rates and How It Works (2)

Even though CDsgive you a predictable return, theyprovide a relatively small return. With rates that usually fall between 1% and 2%, a CD’s rate of growth is so low that it won’t always outpace inflation.If your retirement investments are mostly in an IRA CD, you won’t make as much as you would from adiverse portfolio of stocks, bonds and other investment options.

If you withdraw money from a CD before it reaches full maturity (the end of its term), you’ll have to pay anearly withdrawal penalty.The exact penalty will vary by CD and financial institution.

Don’t forget that an IRA CD is also subject to thesame rules as any other IRA. That means it’s subject to the same IRA contribution limits. You’ll also pay the same taxes and penalties that you would owe forearly withdrawal from an IRA (in addition to early withdrawal penalties for the individual CDs).

Another consideration is that CDs require a minimum investment. A long-term CD could have a minimum as high as $10,000. That naturally makes them a bad choice for people who don’t have enough to pay that minimum.At the same time, remember that CDs with a higher minimum usuallyhave higher yields.

Which CDs Can You Use in an IRA CD?

You can use any CD as part of an IRA. So if you’re looking to open an account, a good way to start is bycomparing CD terms and rates. Somefinancial institutions also offer CDs that are specifically for retirement. These CDs usually have term lengths of 10 years or more. They’re also likely to have higher yields and higher minimums than a CD with ashorter term.

Who Should and Should Not Invest in an IRA CD?

IRA CDs are great for conservative, low-risk investors who want security against their initial capital and a guaranteed yield.If you will retire soon or are already retired, you may want to shift some of the nest egg into an IRA CD. You will earn arelatively low return, but that could be enough if your goal is just to secure the money you’ve already saved.

Because IRA CDs offer a relatively low return, they’re not ideal for younger investors or people who are just starting to save for retirement. Individuals who have decades before they retireare usually better served with a diverse portfolio.

You should also avoid an IRA CD if you’ll need to use the money that you invest. Withdrawing money early from a CD isn’t a good idea because of the early withdrawal penalties.

How to Open an IRA CD

As we mentioned, you can use any CD in an IRA, but some banks have created special CDs for the express purpose of growing retirement savings. They usually offer more favorable terms in exchange for more restricted accessibility (i.e. longer terms). Here are some IRA CDs that you should consider:

  • Capital One: Capital One‘s360 IRA is an option if you already haveanother 360 savings or investment account. Savings in a 360 IRA are placed in both CDs and cash savings. A 360 IRA isavailable as a traditional or Roth IRA and as an individual or joint account. There are no account fees or minimums.
  • TD Bank:One of TD Bank‘s main IRA offerings is a CD account. Known as the TD Choice IRA CD, it has the same rates as TD’s standard CD savings account. TD also offers IRA Add-Vantage CDs, which grow at 0.05% APY. It works a little bit differently as you can make incremental deposits of $500 or more at any time during the CD’s 12-month term.You can deposit up to an additional $250,000 in one term.Both of these accounts require a $250 minimum deposit.
  • Bank of America:Bank of America offers a number of IRA CDs. To earn the highest APY, you’ll want to go with the Featured CD IRA, which ranges from seven months to 37 months. The minimum deposit is $1,000 and it earns between 0.05% and 4.60%, depending on the balance and term. The Fixed Term CD IRA earns between 0.03% and 4.5% from six months to 10 years.
  • Ally Bank:If you don’t mind using an online bank, you should look into Ally Bank. Itoffers various term lengths and interest rates. Its CD accounts also compound interest daily. The IRA High Yield CD comes in terms of between three months and five years. The term length you choose will determine your APY. Ally also has an IRA Raise Your Rate CD, which, as of August 2023, grows at 3.75% on a two-year or four-year term.
  • PNC Bank:This bank also offers IRAs as a CD or money market account. For the CD option, rates range from0.01% to 0.03% APY for six months to 10 years with balances of $1 to $25,000 and over. The minimum deposit to open an IRA CD is $250.
  • Citi: You can also open an IRA atCitiwith a CD or a money market account. Rates range from 0.20% to 5.34 APY depending on the account and term length. You can’t apply for a Citi IRA online. You’ll need to send a printed application, visit a branch or call an account specialist at 1-800-695-5911.

Bottom Line

What an IRA CD Is, Rates and How It Works (3)

An IRA CD is a type of IRA that consists of CDs. You can use any CD in an IRA, but some banks have CDs that are specifically for retirement savings. These usually have long terms of about 10 years and higher yield rates. In general, an IRA CD can be a great way to invest for retirement without exposing yourself to many risks.

Those who are close to retirement or already retired in particular could consider using CDs. If you have decades to go before you retire, you may not want to use an IRA CD. Their low growth rates of 1% – 2% won’t help you as much as a diverse investment portfolio might. As with any investment decision, consider your specific situation, goals and needs before putting money into an IRA CD.

Tips for Retirement Planning

  • Planning for retirement is one of the most important financial ventures you’ll ever encounter. If you’re unsure of whether you’re doing everything you can to maximize your retirement savings, perhaps it could be worth working with a financial advisor. SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
  • As you think about how you need to save for retirement, start with your monthly budget. A good rule of thumb is that in retirement, you’ll spend70% to 80% of what you spend now. Your budget will help you figure out what that translates to in dollars.
  • Employer-sponsored retirement plans, like 401(k)s, are a great way to save for retirement. If you’re self-employed, you can still save by opening aSEP-IRA. A SEP-IRA is relatively easy to set up and has flexible rules on annual contributions.

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What an IRA CD Is, Rates and How It Works (2024)


What an IRA CD Is, Rates and How It Works? ›

IRA CDs are usually fixed-rate, fixed-term accounts. For example, paying 2% interest for a 24-month term. You generally can't take your money out of the CD for 24 months without paying a penalty, but you'll earn dependable 2% interest for the entire time.

How does an IRA CD work? ›

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.

Are IRA CDs worth it? ›

IRA CDs are great for conservative, low-risk investors who want security against their initial capital and a guaranteed yield. If you will retire soon or are already retired, you may want to shift some of the nest egg into an IRA CD.

What is the interest rate on an IRA CD? ›

Best IRA CD Rates
Financial InstitutionAPY*Term
Alliant Credit Union5.05%1 year
Consumers Credit Union5.00%13 months
Ally Bank4.50%1 year
Synchrony Bank4.80%1 year
1 more row

Do you pay taxes on IRA CD interest? ›

Pros of an IRA CD:

Higher interest rates: Typically, these are higher than standard savings accounts, allowing greater potential earnings. Tax advantages: You won't have to pay taxes on any interest gained within the tax year.

What happens when you cash out an IRA CD? ›

Although it's possible to withdraw your money from a CD before the maturity date, you'll be assessed an early withdrawal penalty for doing so. If you're withdrawing your money to invest in something with a better interest rate, the penalty could negatively affect the benefits of switching to another investment.

What happens to an IRA CD when it matures? ›

When an IRA CD matures, you can renew your CD term length, move funds into a new CD term, move funds into a new financial institution's IRA or withdraw funds if you're of retirement age. 14 If you're closing a traditional IRA CD at maturity and taking out the funds, you'll pay taxes on your withdrawals.

Can you transfer an IRA to a CD without paying taxes? ›

Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.

Is there a downside to an IRA? ›

There's a lot to like about Roth IRAs, including tax-free withdrawals in retirement. But the accounts do have some cons, such as no upfront tax break, and income limits for contributing.

Who has the highest 12 month CD rate? ›

Best 1-Year CD Rates
  • Northpointe Bank – 5.30% APY.
  • Prime Alliance Bank – 5.30% APY.
  • Bask Bank – 5.30% APY.
  • Colorado Federal Savings Bank – 5.30% APY.
  • My eBanc – 5.30% APY.
  • West Town Bank & Trust – 5.30% APY.
  • First Internet Bank – 5.26% APY.
  • Mountain America Credit Union – 5.25% APY.

Who has the best IRA rates right now? ›

Compare the best IRA CDs
Synchrony Bank50.25% to 5.10%
NASA FCU4.974.00% to 5.35%
Digital Federal Credit Union4.823.46% to 4.86%
Service FCU4.760.80% to 5.00%

How much can you put in IRA CD? ›

However, you can't add $10,000 to a CD in a single year. Instead, you can only contribute up to the annual IRA contribution limit. For 2024, the IRA contribution limits are $7,000 if you are under 50 and $8,000 for those 50 and older.

What is a good IRA rate of return? ›

Depending on your investment choices, you may be able to earn that 6% to 7%, or potentially more. You may also earn less, or lose money.

Is an IRA CD a good idea? ›

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.

How much does a $10,000 CD make in a year? ›

Earnings on a $10,000 CD Over Different Terms
Term LengthAverage APYInterest earned on $10,000 at maturity
1 year2.62%$265.17
18 months2.23%$339.84
2 years2.09%$426.48
3 years1.95%$601.95
3 more rows
Jun 14, 2024

What is the biggest negative of putting your money in a CD? ›

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

What happens to an IRA CD when the owner dies? ›

If the owner of a CD account passes away, the CD beneficiary can claim that account. This typically means contacting the financial institution where the CDs are held and offering proof of identity. The bank may also need to see a copy of the account owner's death certificate.

What is the difference between an IRA certificate and a CD? ›

While they are designed to help people save, they are inherently different. An IRA is designed for long-term investing for retirement income while a CD is considered a short-term savings account.

Is a RMD required for an IRA CD? ›

Which types of IRAs require me to take an RMD? If you have a Traditional, Rollover, Inherited, SEP, or SIMPLE IRA, you'll need to take an RMD. RMDs are not required with Roth IRAs, unless you inherit a Roth IRA from a non-spouse.

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