What's the difference between an individual retirement account (IRA) and a certificate of deposit (CD)?
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 2016, 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.
An Individual Retirement Account or IRA is a type of tax deferred retirement account. It is a receptacle for holding assets from stocks, bonds, mutual funds, and even a CD if you wanted. A Certificate of Deposit or CD is a "time deposit" by a bank or credit unions and normally has FDIC insurance. So, one is a type of account and the other is a type of investment with various maturity dates depending on which you chose. They are generally 6 month, 1 year, 2 year, and up to 5 years, but can go longer. It is not what I would recommend in this low interest rate environment unless you are putting a small portion of your portfolio into CDs as your "safe money."
Hope this helps, Dan Stewart CFA®
The primary difference between an IRA and a CD is the former is a tax-sheltered account, and the latter is a taxable account. In addition, you can invest anything (stocks, bonds, mutual funds, ETFs, options, etc.) in an IRA, but you can only earn a prescribed interest rate for a CD. Consequently, the investments in an IRA can have some risks, whereas the CD is FDIC guaranteed. Thus, your age, risk tolerance, time horizon, and tax factor will guide your decision of which one best suits you.
An IRA is a type of account that denotes certain tax benefits (tax-deferred growth, possibly a write-off on your taxes for the contribution) if you keep the money invested until retirement. A CD is a type of safe investment where you let a bank use your money for a set period of time and they will pay you a set interest rate. You can buy a CD within an IRA or non-IRA account. You can use the contribution to your IRA to buy a CD or other investments such as stocks, bonds, or mutual funds. Hope that helps!
An Individual Retirement Account is a savings account designed to help individuals save for retirement. Not like your typical "savings" account that you would open up at a bank, an IRA has tax advantages determined by the IRS as well as certain limitations. An IRA can be funded with investment securities and cash equivalents. Depending on what an IRA is funded with, the IRA can lose value.
A Certificate of Deposit is an agreement with a banking/lending institution to have a client's cash/cash equivalents deposited into their institution for a set amount of time, with the lending/banking institution agreeing to pay the client a specified percentage rate of return of the deposit for the agreed upon time period.