What's the difference between an individual retirement account (IRA) and a certificate of deposit (CD)?

By Jean Folger AAA
A:

An IRA (Individual Retirement Account) can be thought of as an individual savings account that has tax benefits. You open an IRA for yourself  (that's why it's called an individual retirement account) and if you have a spouse, you'll each have a separate account. An important distinction to make is that an IRA is not an investment itself; rather, it is an account where you keep investments such as stocks, bonds and mutual funds. You get to choose the investments in the account, and can change the investments if you wish. Your return depends on the performance of the investments held in the IRA account. An IRA continues to accumulate contributions and interest until you reach retirement age, meaning you could have an IRA for decades before making any withdrawals.

IRAs are defined and regulated by the IRS, which sets eligibility requirements, limits on how and when you can make contributions, takes distributions, and determines the tax treatment for the various types of IRA accounts.

For example, as of 2014, the maximum you can contribute each year to your traditional or Roth IRA is $5,500 ($6,500 if you're age 50 or older) or your taxable income for the year, whichever is lower. Traditional IRA regulations allow you to take early withdrawals under certain circumstances, Roth IRA regulations are more flexible allowing you to withdraw contributions at any time, as long as you do not withdraw any of the interests earned (otherwise penalties apply).

Certificates of Deposit, on the other hand, are savings instruments issued and administered by banks, credit unions and brokers. Unlike IRAs, a CD can be jointly owned; for example, you and your spouse or you and your child could own a CD together. CDs pay a specified rate of interest over a defined period of time, and repay your principal at maturity, so you know ahead of time how much you will earn over the life of a CD. CDs can be issued in any denomination, and maturities typically range from one month to five years or longer; however, if you make a withdrawal from a CD before its maturity date, you'll owe a penalty. They are FDIC-insured if they are issued by an FDIC-insured bank.

RELATED FAQS

  1. What are the differences between a 401K and an IRA?

    When employers want to give employees a way to save for retirement, they may offer participation in a 401(k), a retirement ...
  2. How can I start an IRA for my child?

    The Roth IRA is hands-down the most attractive retirement plan available for people with at least 15 or more years until ...
  3. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  4. Can I purchase mutual funds for my IRA?

    Learn how to invest your IRA assets in mutual funds. Discover a few of the different types of mutual funds available for ...
RELATED TERMS
  1. IRS Publication 590: Individual Retirement Arrangements (IRAs)

    A document published by the Internal Revenue Service (IRS) that ...
  2. Individual Retirement Account - IRA

    An investing tool used by individuals to earn and earmark funds ...
  3. Individual Retirement Annuity

    A retirement investment vehicle that is structured similarly ...
  4. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  5. Gold IRA

    Definition of Gold IRA
  6. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
Related Articles
  1. Financial worries can make employees less productive at work. As a result, the employee was no longer producing quality work and they might get fired.
    Savings

    Are Financial Worries Affecting Your ...

  2. A description of the top retirement plans for self-employed
    Retirement

    Self-Employed? Top Plans For Retirement ...

  3. Understanding how to save for retirement does not have to be complicated. Here’s what you need to know about the tax-advantaged accounts you may use.
    Retirement

    Want To Know How To Save For Retirement? ...

  4. Whether you're a saver or a financial advisor who want to give their clients a leg up, these 8 tips are essential for financial planning.
    Investing Basics

    8 Essential Tips For Retirement Saving

  5. The Medicare Part D donut hole can confound the best of us. Here's what financial advisors and their clients should know.
    Investing Basics

    'Donut Hole' Essentials For The Financial ...

Trading Center