An IRA CD is a conservative investment account for people nearing retirement (2024)

FAQs

An IRA CD is a conservative investment account for people nearing retirement? ›

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. An IRA CD is a lower-risk retirement account containing a certificate of deposit account. IRA CDs are often offered by banks, credit unions, and financial institutions.

An IRA CD is a safe, FDIC-insured investment that combines the tax benefits of a traditional or Roth IRA with the predictable interest income of a certificate of deposit (CD). However, IRA CDs aren't the best choice for everyone and may be too conservative for many.

If you don't make any changes to your IRA CD when it matures, it will likely be automatically renewed for the same term. Can I add more money to an IRA CD? You typically cannot add money to an IRA CD after an initial deposit.

Shawn Valco, CFP^®, former financial advisor, explains that the difference between regular CDs and IRA CDs is that with regular CDs, interest you earn is taxable in the year you receive it. Valco notes that with Traditional IRA CDs, tax on interest is deferred, allowing more money to stay in the IRA.

Although it's possible to withdraw your money from a CD before the maturity date, you'll be assessed an early withdrawal penalty for doing so. If you're withdrawing your money to invest in something with a better interest rate, the penalty could negatively affect the benefits of switching to another investment.

If traditional IRAs invest in CDs, taxes on CDinterest and gains can be deferred until distributions occur. In the case of CDs held by Roth IRAs, income and gains from the CDs—as well income and gains from other investments—can be distributed tax-free.

Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.

Roth IRA withdrawals represent exceptions. They are tax-free if taken after age 59 1/2 and the account has been open for at least five years.

Yes, you can buy CDs in your IRA through a bank. You can also buy share certificates in your IRA through a credit union. Owning a certificate in an IRA is a good option for risk-averse investors looking to preserve capital and earn a steady return.

Are IRA CDs FDIC insured? ›

IRA CDs are a secure way to invest your money. So long as you open an IRA CD with an FDIC-insured institution, your savings are insured for up to $250,000. Even if your financial institution fails, you're protected up to that amount.

To start with one IRA CD and end up with a different institution holding your IRA CD, you'll need to complete or close the first CD in an early withdrawal, roll over those funds, then open a new CD. Once you do this, you'll need the information for your new IRA in order to complete the transfer.

Once you reach age 73, you are responsible for a required minimum distribution (RMD) each year. We will not make a withdrawal from your account unless you make a specific request. We offer services to schedule your payment automatically.

But IRA CDs have contribution limits. If you are under age 50 and earn taxable compensation, you could contribute up to $6,000 in 2022. Individuals 50 or over could contribute up to $7,000. For the 2023 tax year, you can contribute $6,500, or $7,500 if you're 50 or over.

If you have a low risk tolerance, CDs might be for you. CDs grow your money slowly but steadily. They're best if you want to stash your money away for one to five years and you want a traditional savings option that's very low risk.