Did you know you can put a CD inside an IRA?
If that sounds like nothing more than alphabet soup, here’s what we mean.
An IRA, or Individual Retirement Account, is one of the best tax-advantaged tools available to help you invest for retirement. IRAs can hold different types of assets, depending on your risk tolerance — including certificates of deposit (CDs).
Like any CD, a CD within an IRA offers a guaranteed fixed return. Investing in a CD within a retirement acountcan be beneficial for people approaching retirement age or already retired, because you know exactly how much your money will grow. However, it’s not the best way to grow money you’re setting aside for decades in the future.
If you’re far away from age 59 ½ (the age you can withdraw from an IRA without tax penalty), you’ll likely be better off investing your IRA in higher-earning (but riskier) options, like stocks, bonds, and mutual funds.
Here are a few of the best IRA CD rates right now, and more about what to consider before opening an IRA CD.
Best IRA CDs for October 2022
|CD Terms||Minimum Deposit|
|Ally Bank||3 months to 5 years||None|
|American Express National Bank||6 months to 5 years||None|
|BMO Harris Bank||3 months to 5 years||$1,000|
|Discover Bank||3 months to 10 years||$2,500|
|Synchrony Bank||3 months to 5 years||None|
Ally offers high-yield IRA CDs in various term lengths: 3 months, 6 months, 9 months, 12 months, 18 months, 3 years, and 5 years. There’s no minimum deposit to open, and no fees. The penalty you’ll incur for early withdrawal depends on the term you choose.
American Express National Bank
You can open an IRA CD with American Express in 6, 12, 18, 24, 36, 48, or 60-month terms. There’s no minimum deposit, but you will need to fund your account within 60 days of opening. You’ll incur a penalty for early withdrawal, which varies depending on term.
BMO Harris Bank
BMO Harris offers IRA CDs in a wide range of terms: 3 months, 6 months, 9 months, 1 year, 18 months, 2 years, 30 months, 3 years, 4 years, and 5 years. You’ll need a $1,000 minimum deposit to open, though you can boost your interest earnings with balances over $5,000 and $10,000. Penalties for early withdrawal vary by term.
IRA CDs from Discover are offered in 3 month, 6 month, 9 month, 1 year, 18 month, 2 year, 30 month, 3 year, 4 year, 5 year, 7 year, and 10 year terms. The minimum deposit requirement is $2,500, and early withdrawal penalties vary.
Syncrony Bank has 3 month, 6 month, 9 month, 1 year, 13 month, 14 month, 15 month, 16 month, 18 month, 19 month, 2 year, 3 year, 4 year, and 5 year IRA CD options. There’s no minimum deposit requirement. You’ll receive a penalty for withdrawing from you account early, which varies by term.
What Is an IRA CD?
Like the name suggests, IRA CDs are a certificates of deposit held within an Individual Retirement Account.
Like a traditional CD, you’ll need to lock up the amount you invest for a specific term; many IRA CD terms range from 3 months to as long as 10 years. In exchange, you’ll earn a fixed rate of return. If you need to withdraw before the end of the term, you’ll incur a penalty — typically a portion of your interest earned.
The IRA that your CD will be held in has further restrictions for withdrawal. IRAs are meant to be used for retirement. That means you won’t be able to access your money without a 10% tax penalty on the amount you withdraw until age 59 ½ (with some exceptions). Upon reaching that age, you can enjoy the tax benefits of the account.
Many banks offer IRA CDs that can go in either a traditional or Roth IRA. A traditional IRA lets you save for retirement with pre-tax money that you pay taxes on when you withdraw. Roth IRAs are funded with money already taxed, and your withdrawals are tax-free after age 59 ½ (you can withdraw contributions at any age after 5 years from account opening, but not earnings).
Are IRA CDs Worth It?
For most people, we don’t believe it’s worth it to keep an IRA made up of CDs. IRA CDs today carry about the same rates as traditional CDs — shorter terms may be under 1% APY and the longest terms earn around 3%. In fact, you can often earn more with a simple high-yield savings account.
The further you are from retirement age, the more risk you can afford. IRA CDs are very secure, but they’re unlikely to build wealth the way an IRA with a more diversified portfolio mix would. Since the S&P 500 has an average annual return of around 8%, and the best CD rates right now top out at around 3%, it’ll be much more difficult to grow your retirement savings in an IRA CD compared to more traditional investments like index funds, mutual funds, stocks, and bonds.
Regular CDs, on the other hand, can be more useful for short-term savings goals — especially as rates rise. Experts we’ve spoken to recommend CD terms no longer than one or two years, so you can keep up with rising interest rates. And there are even more flexible CD types, like no-penalty or bump-up CDs that may be better for rate increases.
With regular certificates of deposit, you don’t have to worry about waiting periods and tax penalties. You will pay a penalty to access funds in a CD before the term ends, and you will owe taxes on your earnings (just like any deposit account), but you can access your money penalty-free once it matures.
That said, someone nearing or already at retirement age may be more inclined to consider an IRA CD to avoid the risk of other investment types. If you’re planning to retire in a couple years — or you’re already past age 59 ½ — an IRA CD is one way to earn a small amount of interest on the money you’ve already saved without risking market volatility. For steady, fixed rates of return, moving some of your money to an IRA CD as you retire is a way to make your portfolio more conservative.
Before you decide to open an IRA CD, consider asking a tax professional about the tax implications these accounts may have for your individual financial plan.
Like any type of IRA, IRA CDs are subject to contribution limits. For 2022, you may contribute up to $6,000 in total (or $7,000 if you’re over age 50). In 2023, limits will increase to Remember, contribution limits are aggregated — which means you can only contribute up to the maximum across any different IRA accounts.
Will IRA CD Rates Go Up?
Rates for IRA CDs are just as affected by Fed rate hikes as savings accounts, mortgage rates, traditional CDs, and other financial products.
As the Fed continues increasing interest rates this year, IRA CDs will likely follow. However, if you lock in a CD before rates increase, you won’t be able to take advantage of the new rates until your CD matures.