A certificate of deposit allows you to lock in the current interest rate for your savings, and these CDs can be added to a retirement portfolio like an individual retirement account.
However, interest rates remain low since the Federal Reserve has stated it will not increase the federal rate in the near future.
Still, IRA CDs can be useful for investors who want to avoid the volatility of the stock market.
“These are certificates of deposit held within an IRA, and retirement savers can use these as a cash investment option within their retirement portfolios,” says Greg McBride, senior vice president and chief financial analyst at Bankrate, a financial data company.
What Is an IRA CD?
Investors can invest in a multitude of assets in an IRA or a Roth IRA, including CDs, Treasurys, stocks and bonds.
Whether they are held inside an IRA or in a savings account, CDs offer a guaranteed return for a specific period of time and are protected by federal deposit insurance for up to $250,000 per person and per each financial institution.
CDs are subject to early withdrawal penalties, so it is important for savers to make sure they have sufficient liquid reserves to avoid cashing out before the maturity of the CD. CDs can range from terms of a few months to five years or more.
“While they can be used to diversify a portfolio or generate income to be used for required minimum distributions, the rates of return are at or below the rate of inflation, so they are best suited for retirees and near-retirees that are seeking a less risky, more balanced retirement portfolio,” McBride says.
Investors can ladder their CDs in their IRAs, similar to the strategy used in savings accounts. A CD ladder ensures that each CD matures at a different time. The different maturities allow savers to access their cash without paying the early withdrawal penalty.
A traditional IRA is funded with pretax money, and the earnings are tax-deferred. With a Roth IRA, you fund it with after-tax money, and both earnings and your withdrawals are tax-free.
Pros and Cons of IRA CDs
- CDs are extremely safe. Unlike with some other investments, you can’t lose your principal, and your return is guaranteed. Plus, the federal government insures your deposits up to $250,000 per bank.
- CD rates may be better. CDs generally earn a slightly higher interest rate compared with what a savings account pays.
- Your earnings may not beat inflation. With CD rates at such low levels, the inflation rate may be higher than your interest rate. When this happens, your CD is effectively losing value.
- You may face penalties for accessing your CD funds early. If you need your money before the CD’s maturity date, the bank generally charges a penalty that costs you some of the interest you’ve earned.
“IRA CDs are one option for very conservative investors who are retired and dislike volatility in the market,” says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. “Since current interest rates are very low, investors should consider other investment options where they might be able to generate more interest.”
The Best IRA CDs
There are still competitive rates being offered for IRA CDs, especially at online banks.
- Ally Bank offers a high-yield IRA CD of 0.6% for one year, 0.65% for three years and 0.85% for five years. No minimum deposit is required.
- Discover Bank offers an IRA CD for 0.5% for one year and 0.6% for five years. The minimum deposit is $2,500.
- Alliant Credit Union offers IRA CDs for 0.5% for one year and 0.65% for five years, with a minimum of $1,000. New account holders must open a savings or trust account with a minimum of a $5 balance before funding a CD, and IRA CD holders must have an IRA account. You can become a member of Alliant Credit Union once it donates $5 to Foster Care to Success on your behalf.
- Synchrony Bank offers a 0.6% rate for a one-year CD and 0.8% for a five-year CD, with a minimum deposit of $2,000.