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

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2 weeks ago

An individual retirement account (IRA) 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.

IRAs

An important distinction to make is that an IRA is not an investment itself. 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, take distributions and determines the tax treatment for the various types of IRA accounts. For example, as of 2018, 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).

Traditional IRA regulations allow you to take early withdrawals (before age 59 1/2) under certain circumstances. Roth IRA regulations are more flexible. If you have a Roth, you can withdraw contributions at any time, but will pay a penalty if you withdraw any earnings before age 59 1/2. There are exceptions to this rule.

CDs

Certificates of deposit (CDs), 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.
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