Understanding CDs and IRA CDs

Congratulations! You’ve worked hard and have a stash of cash you’d like to set aside. Saving can be difficult and making it a priority is something to be proud of. If you’ve made the decision to invest it for the retirement years, that’s admirable.

What to do with the money you’ve gathered, however, can be tricky. If you look around, you’ll find plenty of options for your hard-earned cash. And if you’re interested in keeping that money safe until retirement, you may have seen options like CDs and IRA CDs.

At first glance, those strings of letters might look like a code to break. But once you take a careful look at the differences between CDs and IRA CDs, you can get a better understanding of the options available for saving.

No, but the full answer takes a bit more digging. An IRA is an individual retirement account and a CD is a bank account. The combination of these two is called an IRA CD.

It can be helpful to look at how each one works to better understand them.

A CD, or certificate of deposit, is a type of savings account which allows you to store your money for a fixed amount of time, such as 6 months, 1 year, 5 years or longer.¹ The period of time is often referred to as a term. CDs typically have a fixed savings interest rate.¹ The interest rate shows you how much your money will grow during the term. This can make it easy to know how much you’ll get later.

IRAs are a type of retirement savings vehicle.² They’re sometimes referred to as individual retirement agreements. And the money put into an IRA can be invested in a wide range of other accounts, including CDs, stocks and bonds.³ 

There are several different versions of IRAs, each with its own possible tax advantages. Two popular types are traditional IRAs and Roth IRAs. The biggest difference between them is when money is taxed. In a traditional IRA, contributions are tax-deductible, but withdrawals are taxes as income.² With Roth IRAs, contributions are not tax deductible. But there’s no tax on withdrawals.

An IRA CD is an IRA where your money is invested in CDs.⁴ This type of investment is usually considered to have low risk, because its rates do not rise and fall with the market. Unlike other investments, such as stocks, which could gain or lose money, typically the rate you receive when you open the IRA CD will tell you how much your money will earn during the time it is invested.⁴ This can help those nearing retirement plan out a savings strategy.

Before deciding if an IRA CD is right for your retirement savings plan, it can be useful to go over common concerns about this type of investment.

When it comes time to pay taxes, the deductions you receive will depend on the type of IRA you have. If you have a Roth IRA, you won’t be able to deduct the money you put into it during the year from your income. If you have a Traditional IRA, you will be able to deduct the cash you invest in it from your income. The ways you have your money invested within an IRA, such as in stocks or CDs, won’t impact this.⁴

When you start taking money out of an IRA, the taxes again will depend on the type of account you have. With a Roth IRA, you won’t pay taxes on the amount you take out. For a traditional IRA, you can expect to pay taxes on the money you withdraw.⁴

You typically have to wait until the age of 59½ to take money out of an IRA without paying a penalty.⁵ This is because IRAs are set up to help save for retirement. However, there are some exceptions. If you lose your job and need the funds to pay for medical insurance, for instance, you might be able to do so without paying a penalty.⁵

Many banks offer IRA CDs and will often have different rates. You can check with your local bank and ask what IRA CD options are available there. You can also look online.

As you look ahead to retirement, it can be a good idea to think about how your money could be invested for the future. Both a CD and an IRA CD are options to grow your money until you’re ready for it down the road. Investing now can help make the retirement years a period you truly enjoy.