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What’s So Special About an IRA CD?

What’s So Special About an IRA CD?

One of the products gaining in popularity right now is the IRA CD. As some savers become wary of the stock market, they are turning to cash products that might provide a little more safety and security. Banks, credit unions and other financial institutions can market CDs as being especially appropriate for IRAs, but the truth is that an IRA CD really isn’t so special; it’s just a CD that financial institutions market as being ideal for inclusion in an IRA.

What Can You Put Into an IRA?

First of all, it is important to realize what an IRA is. An Individual Retirement Account is not an investment itself. It is an investment account. You can use your money to purchase different investments, which are held in your IRA. An IRA comes with tax advantages, and is meant to help provide you with income during retirement. You can use the money in your IRA to invest in almost anything you would like from stocks to funds to bonds to real estate. You can also use the money in your IRA to invest in CDs. However, you can invest that money into any CD you would like. It does not have to be a “special” IRA CD in order to be held in your retirement account.

What is an IRA CD?

In reality, IRA CDs are just plain old CDs. Financial institutions might label them as “IRA CDs”, but they have the same characteristics as other CDs. You agree to let the financial institution use your money however it would like for a set period of time. Early withdrawal penalties apply. (With CDs held in your IRA taking that money out of your IRA as part of your withdrawal can trigger penalties related to your retirement account.) Because the institution is using your money, you are paid interest. There are CDs with variable rates, but most CDs come with fixed yields.

Some financial institutions do try to make IRA CDs more attractive by offering higher yields, especially since many CDs marketed as good choices for an IRA have longer terms, usually between three and seven years. There are IRA CDs that have terms as long as 10 years. Many minimum deposits vary from $500 to $10,000, although you can almost always find CDs that allow you to put in more or less. As with any other CD, you are more likely to get higher yields with an IRA CD that has a longer term and a higher deposit.

When your IRA CD matures, the financial institution may automatically renew the CD, putting your money into a new CD of the same maturity at the prevailing interest rate, or the same rate as before. Make sure you understand what your bank will do if you do not direct that the money from your mature IRA CD be used elsewhere. Many financial institutions will notify you seven to 14 days before a CD matures, so that you can decide what you want done with your money. You can put the money from a mature CD into another investment in your IRA, but, unless you meet eligibility requirements for withdrawal from your IRA, you cannot take the money out of your retirement account. You can use the money to purchase bonds to be held in your IRA, or into stocks, or into any number of other investments in your IRA. You can even hold the money in an IRA savings account while you figure out what to do with it.

Whether or not you get a CD labeled as “IRA”, you will receive tax advantages by putting a CD in an IRA. With a traditional IRA, your contribution to the account is tax deductible, lowering your taxable income. If you have a Roth IRA, you won’t get a tax deduction, but your earnings from the CD will be tax free, as long as you follow the rules involved in withdrawal. Additionally, a CD that you put into your IRA is usually protected by FDIC insurance. This means your CD is insured for up to $250,000. (Double check to make sure you get your CD from an FDIC-insured institution.) Knowing that a portion of your IRA is FDIC-insured can provide comfort for those looking for a little more security in a retirement portfolio.

Choosing a CD for your IRA

Before you decide to put your money into an IRA CD, it is a good idea to consider your options. Realize that you do not need a CD to open an IRA. Also, you can put any CD you want into an IRA; it does not need a special label.

When deciding on a CD to put into your IRA, you should compare CDs marketed as ideal for IRAs with other CD options. Compare CD rates from a number of sources to determine what will work best for your situation. In some cases, financial institutions do offer IRA CDs with better terms than many of their “regular” CDs. In some cases, though, you might be better off simply getting a “regular” CD and holding it in your IRA.

Understand, though, that a CD in your IRA is not going to offer great returns. Like most cash products, the low risk associated with a CD means that the yields are going to be low as well. You will probably get a better return than you would with a high yield savings account, but you will still be getting a fairly low yield. Having a portion of your retirement account in cash products like CDs can add security, but you are unlikely to build wealth fast enough to meet your retirement goals if the only holdings in your IRA are CDs.

Another risk you run with adding CDs to your IRA is missing out on higher yields down the road. If you get a seven year IRA CD at 3.49% (Pentagon Federal Credit Union), and interest rates head higher during those seven years, you could be missing out on the possibility of higher yields. It is possible to build a CD ladder within your IRA, using shorter-term CDs so that you have the option of putting the money elsewhere as the CDs mature.

Bottom line: An IRA CD can be a helpful part of your retirement portfolio, depending on your situation. However, you can put any CD in your IRA; it does not need to be designated as an “IRA” CD.

Related Pages: CD rates

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Comment #1 by Anonymous posted on
If you have an Inherited IRA, make sure it is titled correctly (the original owner's name, date of death and FBO you) so there is no doubt it is not your personal IRA!  Otherwise, if you have two IRA accounts at the same institution, one personal and one inherited (but not titled correctly); for FDIC insurance purposes they will be considered as one account--not two, seperately insured for $250,000!  Also, for some arbitrary reason, even if you can find a bank or credit union that handles IRA's; they do not automatically also handle an Inherited IRA--making your investment options much more challenging, particularly in this atmosphere of absurdly low interest yields.

Comment #2 by Anonymous posted on
The question I've always wondered about IRA CDs in this....

If you open an IRA CD with a bank or credit union, by doing so, is that institution opening a new separate IRA account for you with them to hold the CD??

Or, the bank or CU is just opening a CD, and you need to have your own IRA account somewhere to put the IRA CD into??

If the latter, just by way of example, how exactly would one move a Bank of America IRA CD into an IRA account with Fidelity or Vanguard or Schwab, etc???

Comment #3 by Anonymous posted on
Not sure what you mean "You can put any CD into an IRA it does not need a special label." You cannot put a CD that you have into an IRA. IRA CD's are documented differently at banks and credit unions. If they weren't you would pay income tax on them and receive a 1099 at year end. On another note I love IRA CD's and would not use anything else. Thanks to this site it is much easier to shop for the highest rates.


Comment #4 by Miranda (anonymous) posted on
What I mean is that you can open a "regular" CD and put it in your IRA. It does not have to be a CD the bank is marketing as an "IRA" CD. Banks market "IRA CDs", but you can put other CDs in your IRA. It does not have to have that label. Once the CD is in the IRA, it follows IRA rules. As far as opening the CD, I believe it's your choice. You can choose to open an IRA with the institution offering the "IRA" CD, or you can hold the CD in your own IRA account.

Comment #5 by Anonymous posted on
I don't think that you're allowed to put assets into an IRA.

Comment #6 by Anonymous posted on
Another question to ask is whether or not the bank charges an IRA maintenance fee.  Some do & some don't.  In response to #2,  you can open an account at Fidelity or Vanguard & have them to a trustee-to-trustee transfer from B of A.  If you transfer this way versus a rollover, you will not trigger a 1099.

Comment #7 by Anonymous posted on
I have a IRA Share Certificate Account in Randolph-Brooks Federal Credit Union paying 5.17% APY that is maturing this November. I plan to move it first into their IRA Money Market Account, before deciding where to move the funds from there. I'm eligible to withdraw funds from the IRA, as I'm over 59 1/2 years of age, but don't intend to at this time.

Comment #8 by cactus posted on
Another weird article.

IRA CDs are handled as a separate class of account -- the titling is different, the forms are different, the government reporting is different. The terms are slightly different because of the required minimum distribution issue.

At some institutions, IRA CDs even have a different rate structure - either to encourage members to buy them or to take into account the extra admin cost for the credit union or bank.


Comment #9 by Anonymous posted on
At First Community Credit Union in Michigan IRA CD's pay 10 basis points more than their regular CD's.  CD's can be purchased from the bank or credit union side or from the investment side of the instituion. Both can do a transfer to another institution when the CD matures. If it is a local institution I quite often will pick it up and take it to another place myself if close because IRA transfers are done my mail and you will lose interest on those days. If you fill out the papers and request the instituion to do the transfer they sometimes will back date the IRA CD to the date of maturity at the other bank. This past March my husband had a large IRA CD mature in New York but they had a branch about 60 miles away from our home in Michigan. They wanted $25 for each check for the transfer and the transfer is by mail. I drove down with my disabled husband had a nice lunch picked up 2 checks invested one in our home town that afternoon which had higher rates and converted it into a Roth and sent the larger one by over night mail to a bank in Texas because they rates were just 10 basis points lower but they also allow you to take money out if you are over 59 1/2 with no penalty to get a higher rate if rates go up or to convert to a Roth with no penalty as long as you left $1000 in the original CD. I had the papers already filled out and in their possession and they also back dated it to the day I mailed it. They did not get to making the CD out for a few days but still backdated the CD. There are some banks and credit unions that still do this. Pentagon Credit Union used to do this and their highest rates for the year quite regularly would go up around Dec 28 and you could just call them on the phone if you were 59 1/2 and they would convert the IRA CD to the higher rate with no penalty for as long as you wanted. We still have several CD's at 6.25% that will mature the end of 2013 and early 2014. They discontinued this in Sept of 2007 but if had not done this to an IRA CD for that year you could do it one more time before the CD matures. Don't think the rates will go that high before 2014. I usually go out as long as I can on the highest rate I can get. Try to have at least one IRA that allow us to take our RMD out for all the CD's at all institutions for each of us cuz my husband will have to start next year and I will have to do this in 3 years or have CD's laddered so you can take all of your RMD out of that CD before getting another CD especially if rates are lower than your other CD's. You cannot move an IRA to another instituion without  taking your RMD if required so that is why it is nice to try to have all CD's mature in DEC. That is why I really like to have the CD's mature in DEC or have a CD someplace that I can take it all out of. The CD in Texas is 3.9% and the lowest earning CD so it will be nice to take it all of there next year in DEC with no penalty, if rates start to go up.

Comment #10 by lou posted on
To poster # 9  Would you mind identifying the bank in Texas that has IRA cd's at 3.9%. If you did this four weeks ago, I would bet it was USAA Bank. If not, please let us know.

Comment #11 by smokeboat (anonymous) posted on
This article raises more questions than it answers....

Comment #12 by jshannon posted on
3. Is Everything in Place?

Take nothing for granted when it comes to your IRA. "Before year end, double check on all IRA funds that moved during the year," DeVeny said. "Make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts. Look for any unexplained distributions during the year."


Comment #13 by Anonymous posted on
Misinformation Miranda is back!

Comment #15 by Anonymous posted on
I think that I'd rather have an incoherent expert than an articulate idiot.

Good information that you can't understand is better than bad information.

Comment #16 by Help! (anonymous) posted on
I'm 23 years old and beneficiary of IRA from my mother who passed away. I changed my IRA to cd by advise of my bank's financial adviser. I read to many differences about it. Did I do right?

Comment #17 by Anonymous posted on
#16  I think you may be confused about what an IRA is.   I don't think the bank's financial adviser meant for you to "change the IRA into a CD".  He may have meant for you to put whatever funds were in it into CDs and keep it like that.   You are young to have inherited someone's IRA so I would suggest you read some information about IRAS so you will know how to handle it without having to pay extra taxes on it because you might do the wrong thing.  I would suggest you read Miranda's article on this thread about IRAs.  It has some important info in it that you should know.  I don't think she included info on "inherited" IRAs but you can do a google search on it to educate yourself.

Comment #18 by Anonymous posted on
#16  This is an article on Inherited IRAs you might want to read:

The second page of the article is important because it pertains to people who inherit who are not spouses or children of the original owner.  The IRS has a special publication just on IRAS but you might want to read this until you can get their info.