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What is an IRA CD? A safe investment for people near retirement

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  • An IRA CD is a type of retirement account that invests your money in a certificate of deposit and locks in your rate of return for a set amount of time.
  • Traditional, Roth, and SEP IRA CDs follow the usual guidelines regarding taxes, early withdrawal penalties, and contribution limits as any other IRA.
  • IRA CDs could be a worthwhile option if you’re nearing retirement and looking for a safe investment — but if you’re younger, you can probably afford to take more risks for more growth.
  • See Business Insider’s picks for the best IRA CDs »

You’re probably familiar with an individual retirement account (IRA), a tax-advantaged investment account that helps you save for retirement.

You also may have heard of a certificate of deposit (CD), a savings account that locks in your APY for a set amount of time.

But what’s an IRA CD? It’s a type of account that combines these two concepts.

An IRA CD locks in your APY for a set amount of time and saves your money specifically for retirement. It can be an option worth considering for people who are getting close to retirement and are looking for a safe way to invest their money.

What is an IRA CD?

An IRA CD is a type of retirement account that invests your funds in a certificate of deposit (CD). When you open a regular CD, you’re putting away money for the near future — with an IRA CD, your CD is part of your long-term retirement savings strategy. 

Most banks allow you to choose between a Traditional and Roth IRA CD, and some offer SEP IRAs for people who are self-employed. An IRA CD follows most of the same rules as any other IRA. You’re limited to a certain amount in contributions per year, and you’ll pay the usual taxes and penalties for early withdrawals that you would with any other Traditional, Roth, or SEP IRA. 

This means you’ll contribute after-tax dollars to a Roth IRA CD, and you won’t pay taxes when you withdraw money. For a Traditional IRA CD and SEP IRA CD, you’ll typically contribute money before taxes are taken out, then pay income tax on withdrawals.

Who should open an IRA CD?

Generally, your retirement savings strategy should change as you approach retirement. If you have a significant number of years left to invest, you’ll likely want to take on more investing risk than an IRA CD can provide. If you’re retiring in the next few years, however, an IRA CD can be a less risky option for investing with a guaranteed rate of return.

The pros and cons of IRA CDs

Here are the pros of opening an IRA CD:

  • It’s a good option if you are looking for a safe investment strategy.
  • It may appeal to you if you’re only a few years from retirement.
  • You’ll have the guaranteed rate of return that comes with CDs and the tax benefits that come with IRAs.
  • You don’t have to pay brokerage fees.

Here are the cons of opening an IRA CD:

  • It’s not a good match for anyone wanting to take risks with investments.
  • If you’re young, you probably have time to take riskier investments that will earn you more in the long run.
  • You’re limited to how much you can contribute to an IRA annually.
  • You could end up paying considerable early withdrawal penalties. You’ll pay the bank’s early withdrawal penalties if you take out funds before the CD matures. You’ll pay the usual 10% fee if you withdraw from an IRA before age 59 1/2. And if you withdraw before the IRA CD matures and before you turn 59 1/2, you’ll pay both penalties.

Where can you open an IRA CD?

Don’t assume that just because a bank offers a CD, it also has IRA CDs — it isn’t all that common. Of the banks that do offer IRA CDs, the best rates are currently at Ally, Capital One, Discover, Synchrony, and Signature Federal Credit Union.

  Ally (Member FDIC) Capital One (Member FDIC) Discover (Member FDIC) Synchrony (Member FDIC) Signature
Term length 3 months – 5 years 6 months – 5 years 3 months – 10 years 3 months – 5 years 3 months – 5 years
Type of IRA CDs Traditional, Roth, SEP Traditional, Roth Traditional, Roth Traditional, Roth Traditional, Roth
APY 0.50% – 1.15% APY 0.25% – 1% 0.25% to 1.15% 0.25% – 1.20% 0.45% – 1.20%
Minimum deposit $0 $0 $2,500 $2,000 $500
  Learn more Learn more Learn more Learn more Learn more

These banks offer competitive rates and a variety of term lengths, and they don’t charge monthly maintenance fees. Your choice may come down to what term length you want, how much you have for an opening deposit, or whether you want a SEP IRA.

Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.

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