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 the word “individual” is in the name). If you have a spouse, you can each have a separate account, but never a joint account.

An important distinction to make is that an IRA is not an investment itself. Rather, it is an account in which you keep investments, such as stocks, bonds, and mutual funds. You get to choose the investments in the account and can change them 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.

Key Takeaways

  • An IRA is a retirement account that holds investments in such assets as stocks, bonds, and mutual funds, and its value rises and falls with those investments.
  • A CD is a savings instrument that pays a specified interest rate over a defined period of time and repays the principal when that period ends, so you know in advance what you will make from it.
  • You own an IRA by yourself, but you can purchase a CD jointly with someone else, such as a spouse or child.

Individual Retirement Accounts

The Internal Revenue Service (IRS) defines and regulates IRAs. The IRS sets eligibility requirements, limits on how and when you can make contributions, and the amount of required minimum distributions (which you must start taking from your traditional IRA accounts when you reach age 70½). It also, of course, determines the tax treatment for the various types of IRA accounts.

For example, as of 2019, the maximum you can contribute each year to your traditional or Roth IRA is $6,000 ($7,000 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 interest earned (otherwise penalties apply).

CDs are usually insured by the FDIC for up to $250,000, but IRAs are not.

Certificates of Deposit

Certificates of deposit (CDs), on the other hand, are savings instruments issued and administered by banks, credit unions, and brokers. Unlike an IRA, a CD can be jointly owned. For example, you and your spouse or you and your child could own one 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 insured by the Federal Deposit Insurance Corporation (FDIC) if they are issued by an FDIC-insured bank.

Advisor Insight

Rebecca Dawson
Silber Bennett Financial, Los Angeles, Calif.

IRAs are available to anyone of any age as long as you have earned income. You can invest the funds in your IRA in, but not limited to, stocks, bonds, mutual funds, and CDs.

An IRA is an account that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis, depending on the type of IRA.

A CD is a type of fixed-interest-rate deposit over a set period of time. When that term ends, you can withdraw your money or roll it into another CD.

CDs offer a low return but are among the safest investments a person can make. The interest rate is determined ahead of time. You’re guaranteed to get back what you put in, plus interest, once the CD matures. What’s more, if the bank goes under, your deposit is likely insured by the FDIC for up to $250,000.