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You can put certificates of deposit (CDs) into an individual retirement account (IRA), but whether you should or not depends on your personal investment goals, retirement time frame, and risk tolerance. Risk-averse investors who are not seeking steep investment gains might consider CDs in their retirement account.
However, since CDs lock up the funds for a specific term and may charge an early withdrawal penalty, you might prefer a different savings account if you believe you’ll need access to the money before retirement.
Key Takeaways
- A certificate of deposit (CD) is a type of savings account that usually earns a fixed interest rate, but your money is locked up for a specific term length.
- People saving for retirement can contribute to an individual retirement account (IRA) with tax advantages.
- Whether to add CDs to your IRA depends on your individual retirement goals, risk tolerance, and time horizon for investing.
Investopedia / Jake Shi
Common Types of Investments in an IRA
An individual retirement account (IRA) is a popular way to save for retirement while enjoying tax advantages.
Traditional IRA
Investors can choose from a traditional IRA, which is tax-deferred, meaning you pay taxes on your money when you withdraw the funds in retirement. A traditional IRA also offers an upfront tax deduction for the amount you contribute, which reduces your taxable income in the year you make the contribution.
Roth IRA
Savers can also select a Roth IRA, which does not offer an upfront tax deduction but offers tax-free earnings growth and tax-free withdrawals in retirement.
Investment Options
An IRA can be a great option for people not offered retirement accounts through their jobs or those looking to invest in a wide range of assets. For example, savers who contribute to an IRA can choose to invest in lower-risk assets like CDs, savings accounts, mutual funds, exchange-traded funds (ETFs), U.S. Treasuries, and higher-risk options like stocks.
Important
IRAs are subject to annual contribution limits. For 2025, you can contribute up to $7,000 and an extra $1,000 if you’re age 50 or older. If you contribute more than the limit, which includes your CDs, you’ll get a tax penalty.
Factors to Consider When Choosing a CD
If you’re new to CDs, investors should note that they have a few main features that should be considered.
Minimum Deposit Amount
Some CDs require you to deposit a minimum amount, such as $500 or $1,000. Other CDs allow you the flexibility to deposit as little as you like.
Federally Insured
CDs offer some of the safest investments since CDs opened at a bank are insured by the Federal Deposit Insurance Corporation (FDIC) and at credit unions, by the National Credit Union Administration (NCUA) for up to $250,000 per depositor.
Term Length
When you select a CD, you’ll also select the term, which represents the length of time your funds are held in the CD. If you choose a fixed-rate CD, you’ll know exactly how much you’ll earn in interest for the specified term.
Standard CD terms include:
- Three months
- Six months
- One Year
- 18 months
- Two years
- Five years
Once the term ends, you can cash out the funds or reinvest the money into another CD. However, you must keep the money in a CD for the term and cannot withdraw the funds early without a penalty.
Interest Rate
Lastly, be sure to pay attention to the CD’s interest rate since they can vary, depending on the financial institution, how much you deposit, and the term length. Typically, CDs with the longest terms earn the highest interest rates, but the tradeoff is that your money is tied up for longer.
Advantages and Disadvantages of Putting CDs Into an IRA
Using CDs to fund your IRA might seem like a safe way to earn a guaranteed return on your investment, but CDs also come with drawbacks.
Advantages
As you approach retirement, investing money securely becomes more important, and CDs offer a safe investment option as long as you select CDs insured by the FDIC or NCUA. Your investments are protected up to $250,000.
CDs earn you a guaranteed rate of interest during their terms. Using CDs to save for retirement within an IRA provides the added benefit of tax-deferred earnings growth. Also, funding an IRA with a CD can offer a safe option for the risk-averse.
Disadvantages
Although CDs are a stable investment option, they might not offer returns as high as you could get with stocks and exchange-traded funds (ETFs). If you’re not risk-averse or are far from retirement with investment time on your side, investment products might offer higher earning potential.
Also, consider whether or not you want to keep your retirement funds tied up in long-term CDs since you could miss out if interest rates rise. For instance, if you open a 10-year IRA CD with a 2.0% annual percentage yield (APY), but rates increase, with new CDs offering 3.5%, you could miss out on significant earnings.
Plus, if you withdraw funds before the CD matures and before you retire, you could face early withdrawal penalties for the CD as well as for the IRA account. Your funds may also be subject to income taxes when you withdraw money, depending on the type of IRA. For example, you won’t pay income taxes in retirement with a Roth IRA CD, but you will pay taxes with a traditional IRA CD.
Note
Some banks offer IRA CDs that earn interest like a standard CD, but IRA CDs follow IRA contribution and withdrawal rules. For instance, if you withdraw funds early (before 59½) from a traditional IRA CD, you’ll be hit with a 10% tax penalty and owe income taxes on the withdrawn amount. However, you may have longer term options and the potential to earn higher interest rates than those for regular CDs.
The Bottom Line
Using CDs as part of your IRA investment strategy can offer a low-risk way to earn a fixed rate of interest. However, remember that you may get taxed or penalized if you pull funds from the IRA CD before you retire, even if it’s matured.
