An IRA CD is an IRA where your money is invested into a CD account. A CD account will give you a high interest rate compared to a checking or savings account. But, your money will be tied in the CD for a good amount of time, this is the CD terms. Your CD term can be as short as 3 months or as long as 10 years.
An IRA is a tax retirement account that will let you save and invest money in several different ways. Keep in mind, it is not an investment and is more suited for a place to put your investments. There are lots of people that use IRA funds to invest in stocks and bonds. No matter which IRA you have, the advantage to this account is that you don’t have to pay tax on the money as you build it up. However, you do have to pay tax before you put money into the account, or after you’ve withdrawn from it. It will all depend on the type of IRA you’ve signed up for.
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Types of CD Accounts to Use in the IRA CD
Typically, you can use any kind of CD account part of an IRA. A great way to see which account is better for you is to compare the different terms and rates each one has to offer. There are some places that offer CDs that are designed for retirement specifically.
Those CD accounts normally come with a longer term period. Plus, they are more likely to own higher yields and minimums compared to a shorter termed CD account.
Advantages of an IRA CD
Some pros that an IRA CD has to offer are:
- They can secure a way for you to invest your money. Once you’ve opened an account with a FDIC insured bank or credit union, your savings will be insured for no more than $250k. Plus, you’ll be protected if the institute fails.
- Their CD interest rates won’t change too often on the market. Once you’ve agreed to open a CD account with a specific rate, that’s the rate you’ll receive. This helps you plan for retirement savings so you know the exact amount you can earn.
- A CD account is normally a transparent investment utensil many people enjoy using. When you invest in an IRA CD, this will make it much simpler and saves you time. It’s much easier than making your own investment portfolio and managing it on your own.
- Normally, investments are subject to management fees. So, depending on how you invest, you might have to pay for brokerage fees and other expenses. Those charges will reduce your retirement savings and will make it more difficult on your end. A CD account won’t come with those fees most of the time.
Disadvantages of an IRA CD
The cons of owning an IRA CD are:
- CD accounts normally give you a predictable return, but their returns are pretty small. Rates that fall in 1% – 2% ranges come with a low growth rate. If your retirement savings are mainly in an IRA CD Account, you won’t make as much compared to a diverse portfolio.
- Withdrawing money from a CD account before it reaches maturity will mean you have to pay an early withdrawal penalty. This penalty will differ depending on the type of CD account you have with your bank or credit union.
- Remember, these accounts follow the same rules as other IRAs. In other words, they fall under the same restrictions as well.
- You must also pay the same taxes and penalties for an early withdrawal.
- Lastly, a CD account will require a minimum deposit before you can do anything else. A long term CD can have a minimum deposit requirement as high as $10k. Which makes it a bad idea for people that don’t have the funds to pay the minimum deposit.
Investing in an IRA CD Account
These types of accounts are great for conservative, low-risk investors that want more protection against the initial capital and yield. If you’re planning on retiring soon, or if you’re already retired, it wouldn’t be a bad idea to put some money into this type of account. Plus, you can get a low return as well.
Since IRA CDs normally come with a lower return, they aren’t the best account for a young investor to have. Or if you’re just starting to save for retirement this account will not suit your needs very well. People who have more time before they retire should get a more diverse portfolio to manage. They would get more out of that portfolio rather than opening an IRA CD. Also, if you need to use the money you invest, it can come with early withdrawal penalties.
Conclusion
Now, you are more educated on what an IRA CD is and what it can do for you. Deciding which CD account to open can be somewhat difficult if you don’t know what you’re looking for. However, there are special CD accounts that are designed for retirement savings to be aware of.
Many CD accounts come with different terms, with an IRA CD, it’s better to have a longer term. This is a great account to invest money for retirement without having too many risk factors involved.
