What Is an IRA CD?

An IRA CD can keep your savings safe.

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An individual retirement account, or IRA, is not a specific type of investment. Instead, it's a tax-advantaged savings plan for retirement. Unlike 401(k) plans through an employer, you can open some types of IRAs yourself. The range of possible investments includes mutual funds, stocks, bonds and bank products. An IRA CD is a type of retirement account issued by a bank or credit union.

CD Basics

CDs, or certificates of deposit, are accounts in a savings institution that tie up your money for a particular period of time, such as 2 years or 5 years. In return, the institution agrees to pay interest until the end of the term. CD interest rates are usually fixed for the duration, but some CDs pay a variable or market rate. When a CD matures, you can choose to roll it over at the same institution or reinvest elsewhere.

Types of IRAs

Depending on your circumstances, you can invest your CD in different types of IRAs. In a traditional IRA CD, you contribute tax-deductible funds and pay taxes only when you withdraw the money. A SIMPLE IRA, or Savings Incentive Match Plan for Employees, and a SEP IRA, or Simplified Employee Pension, are special accounts with similar tax deferral for self-employed people and small businesses. If you open a Roth IRA CD, you must pay income taxes on your contributions before investing, but legal withdrawals are tax-free.

Opening an IRA CD

Investors usually open IRA CDs through banks or credit unions. If you choose a bank that belongs to the Federal Deposit Insurance Corporation or a credit union belonging to the National Credit Union Administration, the total of all your IRA and other qualifying retirement accounts at one institution is insured up to $250,000 in case of bankruptcy. You can also open an IRA CD indirectly through a broker. However, the CD must be titled properly and the broker must keep careful records to ensure your insurance coverage and tax deductions.


The government limits your annual investment in a IRA CD or other IRA, depending on the type of IRA and your age. You must be younger than 70 1/2 at year's end to contribute to a traditional IRA. You normally pay a penalty for withdrawing money before age 59 1/2 from a non-Roth IRA or for not making required minimum withdrawals starting at 70 1/2. With a Roth IRA, however, you can make contributions at any age, withdraw contributions at any time and postpone withdrawals indefinitely. However, you may incur a penalty for withdrawing interest from an IRA CD before 59 1/2.

Return and Risks

IRA CDs in insured banks are easy to open in person or online and keep your money safe from loss of principal, unlike IRAs invested in stocks or mutual funds. However, the return on CDs is usually lower than stocks, and you may lose buying power after inflation. According to CNN Money, stocks have the highest average long-term returns, nearly 10 percent, but expose you to loss of money in a market crash. CNN Money recommends diversifying your savings to reduce your risks.

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