Banking » Savings » IRA vs. CD: What’s The Difference?
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IRA vs. CD: What’s The Difference?

The main differences between CD and IRA include tax benefits, investment options, yield and withdrawal conditions. Here's how they compare
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: April 15, 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: April 15, 2024

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

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Table Of Content

What is IRA?

IRA stands for Individual Retirement Account. It is a type of savings account designed to help individuals save money for retirement. With an IRA, individuals can make contributions on a tax-deferred basis, meaning that they do not pay taxes on the money they contribute until they withdraw it in retirement. There are two main types of IRAs: traditional IRAs and Roth IRAs.

Traditional IRAs allow individuals to contribute pre-tax income, reducing their annual taxable income. The funds grow tax-free until they are withdrawn in retirement, at which point they are taxed as ordinary income. Roth IRAs, on the other hand, are funded with after-tax income, which means that withdrawals in retirement are tax-free.

IRAs have contribution limits and may have income restrictions, depending on the type of IRA and the individual's income level. They are a popular way for individuals to save for retirement and can be a valuable tool for long-term financial planning.

What Is A CD?

CD stands for Certificate of Deposit. It is a type of savings account offered by banks and other financial institutions. When an individual chooses a CD, they deposit a certain amount of money for a fixed period of time, which is called the term. In exchange for the deposit, the bank pays the individual a fixed rate of interest over the term of the CD.

CDs can be a good option for individuals who want to earn a higher rate of interest on their savings but don't want to take on a lot of risks. As of May 2024, a 12-month CD can provide investors with 4-5% APY, depending on the issuer.

CD Vs. IRA: What Are The Main Differences

While CDs and IRAs both offer a way to save money and earn interest, they are designed for different purposes and offer different benefits.

CDs are a low-risk option for short-term savings, while IRAs are designed for long-term retirement savings and offer tax benefits and a wider range of investment options.

Here are the main differences between them:

IRAs offer tax benefits that CDs do not.

Depending on the type of IRA, contributions may be tax-deductible, or the account may provide tax-free growth and withdrawals in retirement. For example, with a traditional IRA, contributions may be tax-deductible, which can reduce the individual's taxable income for the year.

With a Roth IRA, contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. CDs do not provide any tax benefits.

IRAs offer a wider range of investment options than CDs. With an IRA, the individual can invest in stocks, bonds, mutual funds, and other types of securities.

CDs, on the other hand, are limited to fixed-income investments, such as certificates of deposit.

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With an IRA, the individual can choose to invest in CDs,  fixed-income, or variable-income investments that offer a variable rate of return, and this is the most popular choice for most investors.

If you choose it,  the yield is variable and depends on the securities you invest in. You can make 10% a year, but you can also lose money in case the stock market, or any other type of investment you can, drops.

On the other hand, the yield on CDs is fixed – you know exactly how much your money will grow. 

IRAs offer more flexibility than CDs.

With an IRA, if you're after age 59 and 6 months, the individual can withdraw money at any time. Also, there are many cases when you can withdraw your money with no penalty such as first-time home purchase, educational expenses, medical expenses, birth or adoption expenses and more.

However, If you don't meet these conditions, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty.  

With a CD, the individual must wait until the end of the term to withdraw the funds without incurring a penalty. The CD's early withdrawal penalties are changing between banks and issuers, but in most cases, it's between 20% to 50% on the interest earned.

IRAs have annual contribution limits, while CDs do not. For example, in 2023, the contribution limit for a traditional or Roth IRA is $6,500 for individuals under age 50 and $7,500 for individuals age 50 and older.

There are no contribution limits for CDs, although there may be a limit on how much can be deposited into a specific CD account.

What is IRA CD? How’s It’s Different Than Traditional CD?

An IRA CD is a type of certificate of deposit that is held within an Individual Retirement Account (IRA). Like a traditional CD, an IRA CD is a savings account with a fixed interest rate and a fixed term. The main difference between an IRA CD and a traditional CD is that an IRA CD is held within an IRA, which means that it may offer tax benefits for retirement savings.

With an IRA CD, the individual contributes to the account with pre-tax income (in the case of a traditional IRA CD) or after-tax income (in the case of a Roth IRA CD). The funds in the account grow tax-free until they are withdrawn in retirement. When the individual reaches retirement age and begins making withdrawals from the IRA CD, they will be taxed on the amount they withdraw at their ordinary income tax rate.

One of the main advantages of an IRA CD is the potential for tax-deferred or tax-free growth. This means that the individual can save money on taxes over the long term, which can help their retirement savings go further. Another advantage is that an IRA CD is FDIC-insured up to a certain amount, just like a traditional CD, which means that the individual's funds are protected against bank failure.

In Which Cases IRA May Be Better Than A CD?

An IRA may be a better choice than a CD in several situations, including:

  • You want to save for retirement: IRAs are specifically designed to help individuals save money for retirement, while CDs are not. If you are looking to save for retirement and want to take advantage of potential tax benefits, an IRA may be a better option for you.

  • You want potential tax benefits: Depending on the type of IRA you choose, you may be able to deduct your contributions from your taxable income, or you may be able to enjoy tax-free growth and withdrawals in retirement. CDs do not offer any tax benefits.

  • You want a wider range of investment options: IRAs typically offer a wider range of investment options than CDs. This can give you more flexibility to choose investments that meet your specific financial goals and risk tolerance.

Overall, an IRA can be a better choice than a CD for individuals who are looking to save for retirement and want to take advantage of potential tax benefits, wider investment options, and more flexibility.

In Which Cases A CD May Be Better Than An IRA?

A CD may be a better choice than an IRA in several situations, including:

  • You want a low-risk investment: CDs are a low-risk investment that offers a guaranteed rate of return, while IRAs typically offer more investment options and may involve more risk.

  • You want a shorter-term investment: CDs are available with terms as short as a few months, while IRAs are designed for long-term retirement savings. A CD may be a better option if you're looking for a short-term investment.

  • You want a simpler investment: CDs are a straightforward investment that does not involve managing a portfolio of stocks, bonds, or other investments. If you want a simpler investment that doesn't require a lot of time or attention, a CD may be a better option.

Overall, a CD can be a better choice than an IRA for individuals who want a short term investment with low-risk and a guaranteed rate of return.

FAQs

The risks associated with an IRA depend on the investments within the account. Some investments, such as stocks, carry more risk than others.

An IRA has more investment options than a CD, including stocks, bonds, and mutual funds.

The interest rate on both IRAs and CDs can vary depending on several factors, including the type of IRA and CD, the term, investments, and the bank or credit union offering the account.

A CD is a better choice for someone who wants to avoid fees because CDs typically do not charge fees, while some IRAs may charge maintenance or transaction fees.

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Picture of 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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