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IRA CDs: What is it and what you need to know


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Key Takeaways

  • IRA stands for Individual Retirement Account (IRA) and CD stands for Certificate of Deposit (CD). A CD is a type of low-risk, low-return savings vehicle and an IRA is a type of retirement account. IRA CD simply refers to an IRA that is invested in CDs. 
  • IRA CDs can be a useful investment product if you’re nearing or in retirement and want to stash some of your nest egg into a low-risk investment vehicle.
  • Because of their low growth potential, IRA CDs are generally not the best choice for young people who have decades to go before retirement or those who might need access to their investment funds in the short term.
  • There are important rules to consider before investing in an IRA CD, including early withdrawal fees (which can be quite steep) and yearly contribution limits. 

What is an IRA CD? 

To understand what an IRA CD is, we need to define both terms separately — and then put them together. So:
  • An IRA is a type of tax-advantaged investment account that helps you save money for retirement – common types are Traditional and Roth IRAs. IRAs are somewhat similar to a 401(k), but the key difference is your employer is not involved at all with your IRA. IRAs are frequently opened when rolling over a 401(k) to your own account. 
  • A CD — or certificate of deposit — is an investment where you agree to put away a chunk of your savings for a set amount of time and usually for a fixed interest rate. The rates are generally fixed and usually fairly low, so CDs are seen as low-risk, low return investments.  
An IRA CD is simply an IRA whose assets have been invested into a CD. This is sometimes also known as an IRA certificate of deposit. So, an IRA CD is not anything unique, it’s just a phrase used to describe an IRA that is invested in CDs.  An IRA CD makes for a low-risk — but also low upside — way to invest your retirement savings. That’s because even the best IRA CD rates tend to be significantly lower than what you’re able to earn when investing in stocks and bonds.  Here’s what you need to know about IRA CDs as a retirement option.

How do IRA CD Interest Rates Work? 

IRA CD interest rates vary significantly based on which bank you choose, but generally sit at about 1% annual return (measured in APY – more on that below). General rule of thumb: The longer you lock up your money in the CD, the higher the interest rate will be. APY stands for annual percentage yield, and it represents the rate of return you’ll achieve in one year (hence annual), including any compounding effect. Compounding is when interest you’ve already earned is added to the principal, so you’ll earn interest on that, too. 

What are the Rules for an IRA CD? 

The basic rules of an IRA CD are simple: you put the money away for a set period of time in exchange for a fixed or variable interest rate. Those set periods of time, also known as “term lengths,” vary; a CD term might be as short as three months or as long as 10 years.  If you do take your money out of a CD early, you’ll face an early withdrawal penalty. Again, these vary depending on the bank itself, but you may face a fee from the bank (which tends to be larger for longer CD terms), as well as the lost interest you won’t earn for the remainder of the CD term.  Keep in mind that, since this is an IRA CD, you’ll also face the 10% IRS penalty for withdrawing money from a retirement account early if you’re not yet age 59 ½. That’s on top of whatever penalties the bank that offers the CD will charge. Given how low even the best IRA CD rates are, those costs will significantly reduce any of your investment gains.  Finally, an IRA CD is still subject to the same contribution limits as a normal IRA: in 2021, you can contribute only $6,000 (or $7,000 if you’re over the age of 50). And that’s across any and all IRA accounts you may have in your name, no matter how their assets are invested.

What are Some Pros and Cons of an IRA CD? 

Like any other financial product, IRA CDs have both drawbacks and benefits. Let’s take a step back to consider these:  Pros:
  • CD IRAs provide a safe, stable return on your investment – even if it’s a low return.
  • Investing in CD IRAS can be more straightforward than choosing specific stocks, bonds or ETFs, and doesn’t require regular upkeep or recalculation through the CD’s term.
  • Even the best IRA CD rates are pretty low — low enough that they might not even match the rate of inflation, let alone the amount you stand to earn by investing in other stock market assets. So, you will most likely be leaving money on the table by choosing a CD instead of another investment option. 
  • Early withdrawal penalties keep your money tied up (or create unnecessary expenses if you need to access it early).
  • CDs often have minimum investments that might be quite high – for example, there could be a $10,000 minimum investment. 

How Do I Decide if an IRA CD is Right for Me? 

Given the low return of IRA CD rates, IRA CDs aren’t the best choice for every investor.  An IRA CD might be right for you if:
  • you are nearing (or in) retirement and want a very low-risk way to invest some of your nest egg that you won’t need immediate access to
An IRA CD is likely not a good fit if: 
  • you are young — ideally, you should be aiming at more growth to help create a cushy retirement fund over time
  • you’ll need to access the funds in the short term — the significant early withdrawal fees mean breaking a CD is generally a bad idea
  • you don’t have enough money to meet the investment minimums

What are Some Options for an IRA CD? 

If you do decide it’s right for you, here are some of the IRA CDs with the highest rates available on the market — but remember, these options have longer terms to get higher rates.  Connexus Credit Union offers a 5-year IRA CD with an APY of 1%, though it does require a minimum deposit of $5,000. Service Credit Union offers a 5-year IRA CD with an APY of 0.95%, requiring a minimum deposit of $500.  Ally Bank offers a 5-year IRA CD with an APY of 0.80%, and there’s no minimum deposit or balance requirement. 

What Other Options are Available to Me? 

An IRA CD is only one of many ways to save for retirement — and there may be a better one for your needs. For instance, you can stash your traditional IRA assets into other, potentially more gainful investments, such as a basket of stocks in an ETF. You’ll still be subject to the same contribution limits and other rules, but you’ll have an opportunity to see a greater return on your investment. Of course, no investment is completely risk-free — and when you invest in stocks, you aren’t guaranteed any kind of return in the way you are with CDs. But generally speaking, those who leave their investments in the market tend to see positive outcomes over time. Case in point: The average annual return of the stock market, as measured by the S&P 500, has been almost 12% since 1990, and closer to 15% since 2010. That’s a long shot from the best IRA CD rates of 1% or less! Furthermore, you can adjust your IRA investment profile based on how much risk you’re willing to take. Some robo-advisors offer a risk tolerance questionnaire to help you find the right balance between growth potential and risk mitigation.  Investing isn’t risk-free, but it’s one of the most efficient ways to save for your future. And if you have further questions or concerns, you can always turn to a trusted financial advisor to help you make a plan.

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