Banking » Guides » What Is An IRA CD? Beginner’s Guide
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What Is An IRA CD? Beginner’s Guide

IRA CDs allow you to save for retirement while taking advantage of the tax benefits of an IRA. Hoe does it work and should you consider it?
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: January 1, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: January 1, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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An Individual Retirement Account Certificate of Deposit (IRA CD) allows you to save for retirement while taking advantage of the tax benefits of an IRA.

In this article, we will explore what an IRA CD is, how it works, and the potential benefits and drawbacks of investing in an IRA CD.

What Is An IRA CD?

An IRA CD is a type of Individual Retirement Account (IRA) that invests in a Certificate of Deposit (CD).

When you invest in an IRA CD, you are essentially investing in a CD through your IRA account. This means that the funds you contribute to the IRA CD are tax-deferred, meaning you won't have to pay taxes on the interest you earn until you withdraw the funds from your IRA.

There are different types of IRA CDs, including traditional IRA CDs, Roth IRA CDs, and SEP IRA CDs.  IRA CDs are available at banks, credit unions, and other financial institutions. Similar to traditional CDs, they offer a fixed interest rate for a set term.

IRA CD Vs. Traditional CD: How They Compare?

The main difference between IRA CDs and traditional CDs is the tax treatment of the interest earned.

With a traditional CD, the interest you earn is subject to income tax in the year it is earned. In contrast, with an IRA CD, the interest you earn is tax-deferred until you withdraw the funds from your IRA account. This means that you won't have to pay taxes on the interest you earn until you start making withdrawals from your IRA, which is typically after age 59 1/2.

There are also differences in the penalties for early withdrawals. With a traditional CD, you may have to pay a penalty for withdrawing your funds before the CD matures. With an IRA CD, you may face a penalty for withdrawing your funds before age 59 1/2, as well as taxes on the withdrawal.

How Are IRA CD Rates Compared To Traditional CDs?

IRA CD rates are typically similar to traditional CD rates offered by the same financial institution. However, rates can vary based on the term of the CD and the specific institution offering the IRA CD.

In general, IRA CDs may offer slightly lower rates than traditional CDs because of the tax-deferred nature of the account. Because the interest earned on an IRA CD is not taxed until the funds are withdrawn, the financial institution offering the IRA CD may offer a slightly lower rate to account for this tax benefit.

That being said, if there is a difference in interest rates between IRA CDs and traditional CDs – it's usually tiny.

Should I Get An IRA CD?

Whether or not you should get an IRA CD depends on your individual financial goals and circumstances. Here are potential pros and cons to consider:

Pros
Cons
Tax-Advantaged Savings
Low Returns In The Long Run
Certainty
Early Withdrawal Penalties
FDIC Insured
Limited Flexibility
Diversification

Investing in an IRA CD allows you to save for retirement while taking advantage of the tax benefits of an IRA.

IRA CDs are generally considered to be a low-risk investment option. 

Because the interest rate is fixed for the term of the CD, you know exactly how much you will earn on your investment.

With an IRA CD, your principal investment is guaranteed by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration), up to certain limits. 

This means that even if the financial institution fails, you will still receive your principal investment.

Including an IRA CD in your retirement portfolio can help diversify your investments and reduce overall risk.

While CD rates in 2024 are quite high compared to the last 15 years, in the long run they offer lower returns than other investment options, such as stocks or mutual funds.

While the returns are guaranteed, they may not keep pace with inflation, which can reduce your purchasing power over time.

If you need to withdraw funds from your IRA CD before the end of the term, you may be subject to early withdrawal penalties, which can reduce your earnings.

IRA CDs have limited flexibility compared to other investments. 

Once you have invested your funds, you cannot add to or withdraw from the account until the CD matures.

Can I Withdraw From My IRA CD Without Penalty?

The IRA plan rules are also relevant for IRA CDs. Therefore, if you withdraw from a traditional IRA CD before the age of 59 1/2, you may be subject to penalties and taxes. 

The IRS generally considers early withdrawals from traditional IRA CDs to be “premature distributions,” and they may assess a penalty of up to 10% of the amount withdrawn in addition to any applicable taxes.

But, some exceptions may allow you to withdraw funds from a traditional IRA CD before age 59 1/2 without penalty, such as:

  • Certain medical expenses
  • Qualified education expenses
  • First-time home purchase 
  • Certain types of disability or hardship
  • Qualified military reservist distributions

It's recommended to consult with a financial advisor or tax professional before making an early withdrawal from a traditional IRA CD to understand the potential penalties and tax implications.

With Roth IRA CDs, you can generally withdraw your contributions (but not earnings) at any time without penalty, as long as the account has been open for at least five years.

However, if you withdraw earnings from a Roth IRA CD before age 59 1/2, you may be subject to penalties and taxes, unless you meet one of the exceptions listed above.

What Is An IRA CD?
IRA CD allows you to save for retirement and leverage tax benefits. However, it may not be the best investment in the long run. (Photo by fizkes/Shutterstock)

How To Take RMD From IRA CD?

The IRS requires individuals over age 72 (or age 70 1/2 if you reached that age before January 1, 2020) to take an RMD from their traditional IRA accounts each year.

To take a required minimum distribution (RMD) from an IRA CD, follow these steps:

  1. Determine your RMD amount:  The RMD amount is calculated based on your age, account balance, and life expectancy. The financial institution where you hold your IRA account should be able to help you calculate your RMD amount.

  2. Request your RMD: Once you know your RMD amount, you will need to request the distribution from your IRA CD. Contact the financial institution where you hold the account to request the distribution. You can typically request the distribution in a lump sum or in regular installments.

  3. Plan for taxes: Remember that RMDs from traditional IRA CDs are subject to income tax. The financial institution where you hold the account may withhold taxes from the distribution, or you may need to plan to pay taxes on the distribution when you file your tax return.

  4. Consider your investment strategy: If you are using an IRA CD to satisfy your RMD, you may need to plan ahead to ensure that you have enough funds available to cover the distribution. Consider your investment strategy and plan for any necessary adjustments to your portfolio.

How To Choose And Open AN IRA CD?

Here are some steps to open and choose an IRA CD:

  1. Choose a custodian: You will need to choose a financial institution that offers IRA accounts and IRA CDs. Consider factors like fees, customer service, and reputation when choosing a custodian.

  2. Open an IRA account: Once you have selected a custodian, you will need to open an IRA account with them. This typically involves filling out an application and providing personal information.

  3. Fund your account: You will need to fund your IRA account with a minimum deposit to open an IRA CD. The minimum deposit amount can vary depending on the custodian and the term of the CD.

  4. Choose a CD: IRA CDs are available in a range of terms, typically ranging from 3 months to 10 years. Consider your financial goals and how long you are willing to tie up your funds when choosing a CD term. Compare interest rates from different financial institutions to find the best rate for your specific situation.

  5. Review the terms and conditions: Before opening an IRA CD, review the terms and conditions carefully. Look for details like early withdrawal penalties, renewal options, and any fees associated with the account.

  6. Open your IRA CD: Once you have chosen a CD term and interest rate, you can open your IRA CD with the financial institution.

Where You Can Open An IRA CD?

Several types of financial institutions offer IRA CDs, including:

  • Traditional And Online Banks : Banks are traditional financial institutions that offer a range of products and services, including checking and savings accounts, loans, and credit cards. Many banks, including online banks such as Ally or Capital One also offer IRA CDs as part of their product lineup.

  • Credit Unions: Credit unions such as America First, Bethpage Federal, Navy Federal and more offer many of the same products and services as banks, including IRA CDs.

  • Brokerage Firms: Brokerage firms are financial institutions that allow you to invest in stocks, bonds, mutual funds, and other securities. Some brokerage  firms such as Merrill Edge, Fidelity, and Vanguard also offer IRA CDs as part of their product lineup.

  • Insurance Companies: Insurance companies offer a variety of insurance products, including annuities. Some insurance companies such as National Life Group, Farmers and Nationwide also offer IRA CDs as part of their product lineup.

Can I Add Funds To An IRA CD?

In most cases, you cannot add funds to an existing IRA CD. Once you have opened an IRA CD and made your initial deposit, you typically cannot make additional contributions to the account until the CD matures. This is because an IRA CD is a time deposit that has a fixed term and interest rate, and adding funds or withdrawing funds can disrupt the terms of the agreement.

However, some financial institutions may allow you to add funds to an existing IRA CD under certain circumstances, such as if you have a “step-up” IRA CD that allows you to increase your investment at specific intervals.

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FAQs

Yes, you can transfer an IRA CD to another bank or financial institution using a process called a direct transfer or rollover. It's important to follow the rules and regulations for transferring an IRA CD to avoid penalties and taxes.

An IRA is an investment account that provides tax benefits for retirement savings. A CD (Certificate of Deposit) is a type of investment that offers a fixed interest rate for a set term.

An IRA CD is a combination of these two products that offers tax benefits and a fixed interest rate for retirement savings.

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Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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