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Certificates of deposit (CDs) are commonly used for short-term savings goals while individual retirement accounts (IRAs), as the name implies, are designed for retirement savings. A CD is a time-bound deposit account enabling you to save at a fixed interest rate with the added protection of Federal Deposit Insurance Corporation (FDIC) insurance. IRAs are tax-advantaged accounts used to save and invest for retirement. You can, however, put some of your IRA savings into an IRA CD.
Here’s a closer look at how CDs and IRAs compare.
CD vs. IRA: Overview
Saving for short-term or long-term goals
Saving and investing for retirement
No (unless it’s an IRA CD)
Fixed interest rate
Allows other investments
Early withdrawal penalty
Usually several months of interest
Taxes and penalties for early withdrawals before retirement age
What is a Certificate of Deposit (CD)?
A certificate of deposit is a time-bound savings account offered by most banks and credit unions. With a CD, your interest rate is locked in for the duration of the CD until maturity. What’s more, if you want to withdraw your money before the maturity date, you’ll generally have to pay a penalty.
Long-term CDs are often a good choice for savings you know you won’t need during an environment with declining interest rates. For example, if you lock in a five-year term and interest rates fall, you still get that interest rate when it’s no longer available. Of course when rates rise, you’re stuck with the lower rate you agreed to when opening the CD account.
CDs are very safe, as the government guarantees you’ll get your money back, with interest, even if the bank goes out of business, up to FDIC insurance limits. You’re covered up to $250,000 per depositor per institution. That means you get $250,000 in FDIC coverage if you only have a single CD account with a bank or $500,000 for joint accounts.
Pros and cons of CDs
- Extremely safe: CDs are insured by the FDIC.
- Fixed interest rates: Interest rates are locked in for the duration of the CD until maturity.
- Various terms available: May be available in terms such as one month, six months, nine months, one year, three years, or five years. You’ll typically earn higher interest for longer durations. Terms vary by bank.
- Higher interest rates than most traditional savings accounts: Banks are often willing to pay higher interest rates for CD accounts than traditional savings accounts.
- Penalty for early withdrawals: When you need access to funds before the maturity date, you’ll typically have to pay several months of interest as a penalty.
- Inflation risk when rates rise: Even if interest rates rise, you’re locked into the rate you agreed to when opening the account or the most recent rollover date.
- Low returns: There is no potential for high returns, as with investments such as some stocks and mutual funds.
How to get a CD
You can get CDs from most banks and credit unions. Many financial institutions allow you to open a CD account online, even if you’ve never had accounts there before. Opening a new CD account often takes less than 10 minutes if your personal information is readily available. Here are some examples of banks that offer CDs and the terms available:
CIT Bank CD No Penalty
Up to 5.30%
Up to 5.30%
3 months to 10 years
6 months to 5 years
- CIT Bank, part of First-Citizens Bank & Trust, features unique CD options. In addition to regular term CDs, you can open a No-Penalty 11-month CD, or Jumbo CD.
What is an individual retirement account (IRA)?
An IRA is a tax-advantaged savings and investment account designed to help support you during retirement. Most investment firms and some banks offer IRAs. You can generally invest in a wide variety of investments including stocks, bonds, exchange-traded funds (ETFs), and mutual funds.
The tax advantages of IRA accounts can be significant, depending on your investment performance and time horizon. With traditional IRA accounts, contributions are pre-tax. This means you don’t pay any taxes on the amount you contribute the year of your contribution. (Note that if you or your spouse has a retirement account at work, the deduction may be limited or not available, depending on income.) But for everyone, savings grow tax free while they are in the account. Withdrawals are taxable at your regular income tax rate—likely lower in retirement than during your working years.
Contributions to Roth IRAs are made with after-tax money. They don’t receive any tax benefits up front, but qualified withdrawals—including all the money your savings earned while they were in the account—are tax-free. Early withdrawals, which the IRS views as those taken before age 59½, can be subject to tax penalties with traditional or Roth IRA accounts, though there are exceptions.
Tip: Some banks offer IRA CDs. IRA CDs are certificates of deposit accounts with the tax benefits and restrictions of an IRA.
Pros and cons of IRAs
- Tax advantage: The tax advantages of IRAs shouldn’t be understated. Pre-tax or after-tax contributions can be extremely valuable when investment growth compounds for decades.
- Diverse investment options: You can invest in stocks, bonds, mutual funds, ETFs, and other investments as long as your brokerage supports them.
- Flexible contributions: You don’t have to contribute on a specific schedule. While contribution limits apply, you can add funds whenever you want and can afford to contribute.
- Early withdrawal penalties: Withdrawing before the IRS-mandated age of 59½ can lead to taxes and penalties.
- Contribution limits: You’re limited to a specific contribution amount annually. The IRS announces new contribution limits annually. For 2023, you can contribute up to $6,500—or $7,500 if you’re 50 or older.
- Income limits: Higher-income individuals and households are limited in what they can contribute to a Roth IRA. Limits begin at $138,000 for single filers and $218,000 for joint filers for 2023. As income increases, the amount you can contribute reduces until you can’t contribute at all. You can, however, get around these limitations with the strategy known as a backdoor Roth.
How to get an IRA
You can open an IRA at most major brokerage firms and many big banks. When signing up, pay close attention to the type of account (traditional IRA or Roth IRA), so you know how your contributions are taxed.
Fees, available investments, investment platforms, and customer service are factors to consider when shopping for an IRA account.
When should you invest in a CD?
A CD is a good choice when you want to earn interest on savings for a set period of time at a higher rate than most savings accounts. Most CDs have no tax benefit, but the interest rate is guaranteed and your money insured by the FDIC.
When should you invest in an IRA?
IRAs are best for saving for retirement. A variety of investment options, in addition to tax benefits, make traditional and Roth IRAs a top choice for anyone building a retirement nest egg. Even with Social Security benefits, most people will need additional savings and investments to maintain a good standard of living during retirement.
TIME Stamp: CDs and IRAs can both make sense
Many sophisticated savers and investors have a mix of bank and investment accounts, including CDs and IRAs. When you understand the pros and cons of each, you can make an informed decision about how these accounts may fit into your financial goals, and whether an IRA CD would be a useful option.
Frequently asked questions (FAQs)
When are CDs not a good investment?
CDs are not a good choice when you may need funds before the maturity date. They’re also less ideal during periods when interest rates are rising, as you may lock yourself into a lower rate.
Can you move an IRA into a CD?
Some banks and investment companies offer IRA CDs, which let you hold IRA funds in a CD with a similar tax status without incurring taxes and penalties. That would give you the CD’s interest rate protection. Less sensible would be withdrawing funds from an IRA to move them into a non-IRA CD. In that situation, you risk incurring taxes and penalties.
How can you avoid taxes on CDs?
Most CDs are taxable savings accounts. With an IRA CD, you can save in a CD with the same tax advantage as other IRA accounts.
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