What is an IRA CD?

An IRA CD is held in an individual retirement account. IRA CDs and traditional CDs typically share similar features: fixed annual percentage yield (APY), set term length, minimum opening deposit and early withdrawal penalty.

Like a regular CD, an IRA CD is an interest-bearing account, but it also offers potential tax-deductible or tax-deferred options on funds set aside for retirement. The type of IRA CD you choose will determine whether your contributions may be tax-deductible and will grow either tax-deferred or tax-free.

A traditional IRA, for example, lets your earnings grow tax-deferred until withdrawal, while a Roth IRA allows your earnings to grow tax-free. Contributions to a traditional IRA are tax-deductible, but you’ll pay income taxes on withdrawals when you retire. The opposite is true of Roth IRA contributions.

Financial institutions typically offer four types of IRA CDs, including traditional, Roth, Simplified Employee Pension (SEP) and Coverdell education savings account (CESA).

You can open IRA CDs at brick-and-mortar or online banks, credit unions, brokerage firms or mutual fund companies.

You can invest in an IRA CD by rolling over funds from another IRA or depositing money to open a new account. Funding with new money is regulated by the same annual contribution limits for regular IRAs: For 2024, those younger than 50 are limited to $7,000, while those older than 50 have a limit of $8,000.

Best IRA CD rates

Rate shopping is crucial to determine whether an IRA CD could make sense for your financial situation. We’ve made this easier for you by compiling lists of the Best IRA CD rates searchable by term, or the amount of time you agree to leave your money in the account.

Simply click on the drop-down menu at the top right of our Best IRA CD Rates table and choose from terms of three months to six-plus years to start exploring top rates. You can filter your results by factors such as region, deposit amount and online bank.

View rates for credit unions only by checking the Credit Unions box toward the top of the page. You can even search for types of credit unions if you want to get that specific.

Consumers may find some of the best rates with online banks because they tend to have lower overhead costs than brick-and-mortar banks. Credit unions also tend to offer competitive CD rates.

Pros and cons of IRA CDs

Like many financial products, IRA CDs come with a combination of potential advantages and downsides, all of which should be taken into account before committing your funds.

Pros:

• Fixed interest rates that provide a guaranteed return
• Low risk compared with other investments
• Higher interest rates than savings accounts
• Tax advantages depending on the type of IRA CD
• Deposits protected at federally insured banks and credit unions up to $250,000

Cons:

• Lower returns compared with stocks and bonds
• Lack of access to your funds for emergencies or other investments
• IRA contribution limits
• Potential early withdrawal penalties
• Fixed interest rates may be outpaced by inflation

Who is an IRA CD best for?

An IRA CD is geared toward investors nearing retirement or individuals wanting a less risky place to put their money. The trade-off for stable and reliable returns can be more modest growth.

A CD lets you lock in your interest rate and plan your returns over months and years, which can be helpful when planning retirement expenses. If you are decades away from retirement, an IRA CD may not offer the growth you seek.

However, you’ll get guaranteed returns on your principal and federal backing with IRA CDs. An IRA CD can also be useful in diversifying a retirement portfolio and maximizing potential tax benefits, including deductions on contributions.

Shop around for the best rates before you invest. Online banks tend to offer higher rates than brick-and-mortar banks because they have lower overhead costs.

Are IRA CDs a good investment?

Whether an IRA CD is a good investment will depend on your financial goals and your risk tolerance.

First, make sure you won’t need access to your money before you lock it up in a CD. Then, consider your returns. You may be giving up some growth for safety, but this could serve you well if you are close to retirement or prefer a conservative investment strategy.

A few scenarios, in particular, could be optimal for opening an IRA CD:

• You do not have a 401(k) or IRA through an employer.
• You want to enhance your employer’s 401(k) or IRA.
• You are self-employed.
• You want to reduce taxable income by taking advantage of an IRA CD’s tax-deferred benefits.

Frequently asked questions

What is the difference between a CD and an IRA?

A CD is a type of savings account, and an IRA is a tax-advantaged personal savings plan. IRAs are often used as long-term investment tools for retirement income, while CDs are vehicles for short-term growth.

Is there an early withdrawal penalty for IRA CDs?

IRA CDs, like standard CDs, are subject to an early withdrawal penalty, which can vary by financial institution. You may also face a 10% IRS penalty on the withdrawal if you’re not at least 59 1/2.

Can you transfer an IRA CD from one bank to another?

The simple answer is yes, but an IRA transfer or IRA rollover from one financial institution to another is never simple. The transfer process depends on the rules, regulations and documentation requirements of both financial institutions as well as IRS guidelines. You generally can’t make more than one rollover from the same IRA within one year.

Is an IRA CD tax-deductible?

You may be able to deduct some or all of your contributions to a traditional IRA. Contributions to a Roth IRA aren't deductible — and you don't report them on your tax return — but qualified withdrawals or withdrawals that are a return of your contributions aren't subject to tax.