IRA CDs

Can You Put CDs in an IRA?

You can essentially place a CD (certificate of deposit) in an IRA by opening an IRA CD. These products combine the features of both to offer you an additional way to save for retirement.

When you opt for an IRA CD, you are essentially taking the funds of an IRA and investing them into a CD.

The major advantage of CDs is how safe they are. You invest your money for a set amount of time and it grows at a small but regular rate.

Then, after that set time has passed, you can recoup your money along with the growth.

IRA CDs combine the tax advantages of an IRA with the steady and safe savings of a CD, with you essentially opting to place a chunk of your retirement savings into a CD.

This option makes sense for those who are looking to grow some money for retirement without having to worry about the risks and pitfalls of serious investing.

The tradeoff is that the growth will be much smaller than what you could see from a more aggressive strategy. But, it is also much safer.

The more time you have until retirement, the less sense it makes to put CDs into an IRA. A strategic combination of stocks and bonds provides much more growth and income potential. That said, if you are approaching retirement or already retired, maintaining a small allocation to CDs can be a prudent way to ensure liquidity.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

How IRA CDs Work

An IRA CD can work similarly to other IRA investments. You place money into the account, then that money is invested into certificates of deposit.

Similar to other types of CDs, you agree to place your money into the CD for a set amount of time. This could be as short as a few months, but IRA CDs can go much longer since they are typically used as a vehicle for retirement savings.

While the money is in the IRA CD, it cannot be touched. That cash is only available to you once the set time has elapsed.

Since the account is an IRA, it is also tax-deferred. This means that you will not have to pay taxes on the contributions until you take the money out of the IRA CD.

This can be advantageous since those saving for retirement typically have a much smaller income when they are ready to begin taking out their retirement savings versus when they are putting that money away.

IRA CDs are not a way to rapidly or dramatically grow money. But, they can offer you a path to put some money away in a safe account where you know you don’t have to worry about losses and can still experience some growth.

IRA CDs vs. Traditional CDs

There are several key differences between IRA CDs and traditional CDs. One of the primary differentiators is the purpose behind each.

A traditional CD is used to grow money in a predictable way at any stage of life and over any set amount of time. IRA CDs, on the other hand, are primarily focused on long-term retirement savings.

This means that IRA CDs tend to last for a longer set amount of time. There are many ranges available for traditional CDs and some can be very short, even just three or six months.

Since IRA CDs are meant to help build up savings for retirement, they can afford to grow over a longer range of time, even years. CD rates tend to be higher for longer terms as well, meaning you can grow your money even more through an IRA CD.

Another major difference includes the rules on contribution limits. Traditional CDs do not have contribution limits, meaning you can place as much money as you want into a CD. This is not the case for an IRA CD.

IRAs have contribution limits that are set by the Internal Revenue Service, and these limits apply to IRA CDs as well. This means that there is a cap on how much money you can place in an IRA CD each year.

Benefits and Drawbacks of IRA CDs

As with other financial products, there are both pros and cons to investing in an IRA CD.

The main benefit of doing so is the avoidance of risk. As far as saving for retirement, there are few safer and more predictable options than an IRA CD.

You can track exactly how much your money will grow. You know exactly how long it will be until you can access it and there is no risk of catastrophic losses.

The tax advantages that come with saving through an IRA are also a major pro, helping to make those contributions tax-deferred and saving you money in the long run.

But there are legitimate drawbacks as well, the main one being that your money simply will not grow by a lot. The tradeoff for the safety of a CD is that interest rates tend to be very modest.

If you are nearing retirement and looking for a safe way to increase the value of some of your savings over those final years before retirement, then an IRA CD can make sense.

But successfully saving for retirement does involve the risk of investing and allowing for significant growth. Those who are younger and have decades to save and recover from losses may be interested in more aggressive options.

The contribution limits that apply to an IRA are also a significant drawback since they set a cap on how much you can invest each year.

Other Retirement Savings Alternatives

IRA CDs are far from the only way to save for retirement. Standard IRAs are not as safe and can come with much more risk, but also offer the potential for significantly larger growth.

401(k)s are also a common retirement saving vehicle that can be very effective, especially with employee matching.

You also can look into a regular CD. These products don’t have to be purchased only through an IRA. If you are looking for safe and short-term growth, you can invest some savings in a CD that has a term of only a few months or a couple of years.

When saving for retirement, it is important to remember that no one strategy is best. The options that make the most sense for you will depend on your specific situation, what you are hoping to accomplish and how far out you are from retirement.