An IRA CD is an interest-earning account that can help you save for retirement. The IRA CD contains a certificate of deposit (CD), which is an interest-earning savings account, within an individual retirement account (IRA). With a CD, you invest your savings for a set amount of time—whether for six months or six years. During that time, you earn consistent interest. 

How an IRA CD Works

An IRA certificate of deposit (CD) is a retirement account and an investment product. Banks and credit unions typically offer the IRA CD as one easy-to-understand retirement account and product.

An IRA certificate is often a good fit for people nearing or in retirement, as it offers dependable returns. Up to $250,000 per IRA per person at a bank is insured by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Administration (NCUA).

IRA CDs are usually fixed-rate, fixed-term accounts. For example, paying 2% interest for a 24-month term. You generally can’t take your money out of the CD for 24 months without paying a penalty, but you’ll earn dependable 2% interest for the entire time. The combination of insurance and a guaranteed interest rate makes an IRA CD a safer, more conservative investment choice than other investment options like stocks.

Some financial institutions may offer the following IRA CDs: 

• Step-up IRA CDs: Step-up IRA CDs have rates that increase at set intervals in conjunction with interest rate rises. 
• Bump-up IRA CDs: You can request a rate increase if interest rates increase with bump-up IRA CDs. 
• Jumbo IRA CDs: With these CDs, higher interest rates are paid for larger amounts, typically more suitable for a rollover or transfer from another retirement account. 
• Brokered IRA CDs: A brokered CD is a bank CD resold through investment companies. They may be a better fit if you have advanced knowledge of IRA CDs, including the risks of brokered CDs. They may also be a good fit if you want to invest more than $250,000.

Let’s look more closely at a CD and an IRA separately to understand how an IRA certificate combines the two.   

What Is a CD?

A CD is a short-term savings account designed that provides interest in exchange for “locking up” your money for a certain period or term. A CD term can range from 3 months to 10 years. In exchange for interest payments, you agree not to remove funds from the CD for that time or pay a penalty.

However, every investment has risks. With a CD, disadvantages may include the interest rate not keeping up with inflation, which means you would essentially lose money. You could also miss out on potentially higher-paying investment opportunities. You also can’t access funds before the CD’s term maturity date. Finally, you’ll generally also owe taxes on any interest returns earned over the year.

With an IRA CD, you do not pay federal taxes on returns during the year, if you keep funds in the CD. These taxes are either deferred until retirement or not paid at all as with a Roth IRA CD.

What Is an IRA? 

An individual retirement account (IRA) is an investment vehicle for longer-term investment. Typically, you’ll open an IRA at an investment company or brokerage firm. You can include different assets in an IRA such as stocks, bonds, mutual funds, and CDs.

The difference between the two main types of IRA (traditional and Roth) are the way they are taxed: 

• Traditional IRA: With a traditional IRA, you pay taxes on any withdrawals when you take money out in retirement. You can’t withdraw funds from a traditional IRA until you reach age 59½, or you also will pay a penalty. 
• Roth IRA: You don’t pay taxes on the money you withdraw from a Roth IRA in retirement. You can withdraw funds before retirement as long as five years have passed since your initial contribution.

Roth IRAs have income-limit ceilings. If you make too much money, you may only be able to contribute to a traditional IRA. But in general, you don’t have to choose. You can invest in both a traditional IRA and a Roth IRA if your total doesn’t exceed 2023’s annual limits of $6,500 for those under age 50.

Because it’s a retirement account, an IRA CD benefits from various tax advantages. Any account returns you earn aren’t taxed during the year, as with a regular savings or another investment account.

An IRA CD also differs from most IRAs in that with an IRA, you can invest in various asset types like stocks, bonds, mutual funds, and exchange-traded funds (ETFs) as well as CDs. An IRA CD is only the certificate of deposit. Of course, you can have an IRA in addition to an IRA CD.

As of 2023, you can put up to $6,500 annually into Roth and traditional IRAs combined. If you’re 50 or older, the limit is $7,500.

Pros and Cons of an IRA CD

Pros explained 

• Stable, dependable returns: For those near or in retirement, an IRA CD offers reliable returns compared with the volatility or risk of stocks, bonds, ETFs, and other investments. 
• Higher interest rates: If you have money sitting in an IRA, you’ll likely earn higher returns with an IRA CD. IRA CDs also may offer higher returns than a regular CD and the opportunity to lock in higher, consistent rates over a period such as five to seven years. 
• Tax advantages: You don’t pay taxes on any interest earned in an IRA CD during the tax year unless you take money out. With a Roth IRA CD, you won’t pay federal taxes at withdrawal as long as you meet Roth IRA withdrawal rules. 
• No or low fees: Unlike other investment types, such as mutual funds, monthly management fees aren’t standard for any CD.  
• Compounding interest: Depending on how your CD is structured, the interest you earn is added to your principal, allowing you to make compounded interest, or interest on interest. 

Cons explained 

• Low. long-term returns: IRA CD interest rates vary over time but rarely keep up with average historical returns earned from higher-risk investments and may not beat inflation’s bite.  
• Paperwork and hassles: When your CD matures, you’ll need to decide whether to renew the CD, withdraw funds (if in retirement), or move your funds into a new IRA elsewhere using a transfer or rollover. This can involve paperwork and hassles to avoid any tax consequences. 
• Minimum required: Unlike an IRA savings account, the bank or credit union will likely ask you to contribute a specific dollar amount. You won’t be able to add to this amount in the future. 
• Penalties possible: If you close an IRA CD early to withdraw your money, you may pay a penalty to the bank and the IRS. 
• Confusing variations: Each financial institution structures a CD differently. Some allow you to access your interest, while others don’t. Your interest may compound daily, monthly, or quarterly. You’ll need to read the fine print. 

How to Open an IRA CD 

You can open an IRA CD in one of three ways: with a contribution, indirect rollover, or transfer/direct rollover. Let's look at each of these methods of opening an IRA in more detail.

Contribution 

When you make a contribution, you deposit money into an account, up to the annual IRS IRA limits.

1. Shop for interest rates, term lengths, and advantages among banks and credit unions. 
2. Choose whether you want a Roth IRA CD or a traditional IRA CD. You may need to meet with a tax professional to decide. 
3. Open your IRA account and provide any necessary documents to the financial institution.
4. Move money into the IRA CD through transfer, check, or another method. 

Indirect rollover

Rollovers allow you to move money from one retirement account to another. Rollovers don’t count toward your annual contribution limits. In most cases, you can only have one indirect rollover in any 12 months from one IRA.  

1. Request a distribution from your retirement account. 
2. Receive the funds through an IRA distribution, typically by check.
3. Open an IRA CD account with a financial institution. 
4. Within 60 days of receiving the funds, deposit the funds received into the new IRA CD to avoid tax consequences.

You can’t roll over all types of accounts. For example, due to the tax implications, you can’t roll a Roth IRA CD into a traditional IRA CD. In other cases, you may find that a percentage is held back until tax time. Speak with a professional to find out which rollovers qualify.

Transfer or direct rollover

With a transfer or direct rollover, you request a movement of funds from one financial institution’s IRA account to another institution’s IRA account. You can make unlimited transfers because you don’t handle the distribution as a rollover.

1. Find an IRA CD at a new financial institution and open the IRA account. 
2. Request the transfer of IRA funds from your original financial institution to the new financial institution. 
3. The first financial institution sends a funds transfer check to your financial institution for your benefit. 
4. The funds are deposited into the IRA CD.

Is an IRA CD Right for You?

An IRA CD is rarely suitable for the younger investor with a long inv horizon until retirement. The CD’s interest rate is unlikely to keep up with returns from higher-risk investments over decades. However, if you’re new to retirement savings and worried about losing your principal, an IRA CD may be a first step or a counterbalance to riskier investments. Opening an IRA CD with your current bank or credit union can be easy.

Those nearing or in retirement can potentially use IRA CDs as low-risk, fixed-income investments for daily living or future planned expenses. A CD ladder strategy keeps CDs opening and maturing annually, offering you a choice either access to cash or a reinvest.

Whether you should choose a Roth or traditional IRA CD can depend on your tax bracket and retirement tax strategy. Consider consulting with a professional financial advisor.

The Bottom Line

An IRA CD is a tool to balance risk in your overall retirement portfolio and has several benefits as you approach retirement age. In retirement, you’re more likely to prioritize fixed income investments that preserve your wealth. An IRA CD can be ideal when you have a low risk tolerance and want to protect your principal and future returns.

The best way to decide whether an IRA CD is right for you is to speak with a professional financial advisor. Together, you can figure out how an IRA CD may fit into your long-term retirement strategy.