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. Will I pay taxes on my Social Security payouts?

    Find out if you're one of the people who has to pay federal income taxes on the Social Security benefit you receive.
  2. Can I deduct my Individual Retirement Account (IRA) contribution on my tax return?

    Whether you can deduct IRA contributions on your tax return depends on the type of IRA you have, your participation in an ...
  3. Can I contribute to a Roth IRA and still participate in my employer-sponsored retirement ...

    Find out the rules and limits on contributing to both a Roth IRA and employer-sponsored retirement plan.
  4. At what age will I be eligible for the maximum Social Security payout?

    The year you choose for collecting your social security will play a large part in determining how much money you'll receive ...
RELATED TERMS
  1. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  2. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  3. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  4. MyRA

    A new tax-advantaged retirement account that President Barack ...
  5. Provident Fund

    A compulsory, government-managed retirement savings scheme used ...
  6. Rollover IRA

    A special type of traditional individual retirement account into ...
comments powered by Disqus
Related Articles
  1. 5 Ways To Stretch Your Retirement Budget
    Budgeting

    5 Ways To Stretch Your Retirement Budget

  2. It's Never Too Early To Start Saving
    Savings

    It's Never Too Early To Start Saving

  3. 5 Tax(ing) Retirement Mistakes
    Retirement

    5 Tax(ing) Retirement Mistakes

  4. Payroll Deductions Pay Off
    Retirement

    Payroll Deductions Pay Off

  5. 10 Steps To Tax Preparation
    Taxes

    10 Steps To Tax Preparation

Trading Center