The stock market can move wildly at times, up hundreds of points one day, down hundreds the next. In the long run, however, stocks tend to appreciate, and history shows that investing in them is the most likely path to long-term growth for accounts like a Roth IRA.

But that’s cold comfort if you’re planning to tap into your Roth IRA soon—because you’re on the verge of retirement, say—or if you’re already dependent on it for much of your income. If you have a short time horizon for your investments or just a really low tolerance for risk, you might want to consider a Roth IRA certificate of deposit (CD).

Key Takeaways

  • A Roth IRA CD is a certificate of deposit held inside a Roth IRA, and some banks create CDs expressly for that purpose.
  • On the plus side, CDs can be a safe and predictable source of income, counterbalancing volatile stocks.
  • On the downside, CDs tie up your funds—carrying heavy penalties for withdrawals before maturity—and their interest rates are low and fixed, putting your money at the mercy of inflation.

What Are Roth IRA Certificates of Deposit?

A Roth IRA CD is basically a certificate of deposit—much like the certificates of deposit you’re used to seeing advertised at your local bank—that's held inside a Roth IRA. It works like any CD, offering a fixed interest rate over its lifetime, typically anywhere from six months to 10 years. The money is meant to be kept in the CD until maturity; if you withdraw it before then, you'll usually be hit with penalties.

You can put any bank’s CD in your Roth IRA. And some financial institutions have created special CDs expressly for this purpose, called IRA CDs. These CDs tend to be on the longer side, term-wise (a decade or even more) but offer higher interest rates than you might get elsewhere.

Benefits of Using CDs in Your Roth

There are three main benefits to using a certificate of deposit in your Roth IRA.

  • You get a consistent, predictable return. The APY (annual percentage yield) given for the CD when you invest is the return you will receive until it reaches mauturity.
  • You have an almost complete lack of risk. No investment is 100% safe, but CDs come pretty close. Like most bank accounts, they come with FDIC insurance (if a CD you’re considering doesn’t—move on). If your Roth IRA CD is federally insured, you’re covered up to $250,000 if the financial institution goes under.
  • CDs offer higher yields than other insured bank products, such as savings accounts or money market accounts. For example, in mid-August 2019, the average interest rate was 0.56% for a 12-month CD, 0.09% for a savings account, and 0.19% for a money market account, according to the FDIC's Weekly National Rates and Rate Caps report.

Downsides to Using Roth IRA CDs

No investment is perfect. There are three big disavantages associated with putting certificates of deposit in your Roth IRA.

  • You’re likely missing out on much higher yields elsewhere. Yes, CDs pay better than other bank products, but they pay less than other investment vehicles. As of August 2019, the highest CDs were offering APYs around 2.70%. That’s roughly half the return posted by stock and bond funds in 2018.
  • The second drawback ties in with the first. Since you are locked into a relatively low rate of return, your money may lose ground to inflation. If you invest $100,000 in a CD today earning 1%, and inflation is 3%, when you get your money out of the CD it will have less buying power than when you put in. Inflation will be slowly eating away at your investment principal.
  • Your access to your funds is restricted. The penalties for withdrawing money early from your CD don’t much matter if you’re years away from tapping into your Roth, or if the account’s less than five years old (since you can’t withdraw earnings tax-free from it before then, anyway). But if your income needs are in flux, why risk being dinged? After all, the Roth’s flexibility—being able to withdraw your contributions from it at any time—is one of its major selling points.

Putting one or more CDs in your Roth IRA makes the most sense if you're very close to retirement or already there.

The Bottom Line

Certificates of deposit in a Roth have their pluses. But they’re probably not the best choice if you have decades left for your Roth to grow, since you should be investing more for appreciation than income, and you have time to weather the stock market’s ups and downs.

However, if you are at or near retirement age, they can be a good, low-risk way to balance out a portion of your investment portfolio, a counterbalance to the market’s volatility. You might also consider building a CD ladder within your Roth IRA to help manage your cash flow and ensure you don’t get locked into a low interest rate for too long.