Should You Put CDs in an IRA?

Opening an individual retirement account (IRA) is one way to build wealth for the long term. An IRA can hold different types of investments, including certificates of deposit (CDs). CDs offer a safe, secure way to grow your money—but does it make sense to keep them in an IRA? It can, though putting CDs in a retirement account may not suit every investor.

Key Takeaways

  • An individual retirement account (IRA) is a tax-advantaged account that's designed to hold retirement savings.
  • Certificates of deposit (CDs) are time deposit accounts that pay interest over a set maturity term.
  • Retirement savers can add CDs to an IRA, and some banks even offer special IRA CD options.
  • Whether it makes sense to hold CDs in an IRA can depend on your investment goals, risk tolerance, and time horizon.

Individual Retirement Account (IRA) Basics

An IRA is a tax-advantaged account that's designed specifically for retirement savings. There are two basic types of IRAs to choose from: Roth and traditional.

A Roth IRA is funded with after-tax dollars and allows for 100% tax-free qualified distributions in retirement. Your ability to contribute to a Roth IRA is based on your tax filing and income. Here are the Roth IRA contribution income phase-out limits for 2022:

  • $129,000 to $144,000: single taxpayers and heads of household
  • $204,000 to $214,000: married, filing jointly
  • $0 to $10,000: married, filing separately

Traditional IRAs are funded with pretax dollars, and contributions may be tax-deductible. Your income does not affect your ability to contribute to a traditional IRA. The IRS does, however, consider your modified adjusted gross income (MAGI) and whether you're covered by a retirement plan at work for determining how much you can deduct. If you're married, the IRS also takes into account whether your spouse is covered by a plan at work.

For 2022, a full deduction is allowed if you're covered by a plan at work and you are:

  • Single or head of household and your modified AGI is $68,000 or less
  • Married filing jointly or qualifying widow(er) with a modified AGI of $109,000 or less

If you're not covered by a plan at work and file single, head of household, or as a qualifying widow(er), you can deduct the full contribution, regardless of income. The same is true if you're married and your spouse is not covered by a workplace plan either. For married couples filing jointly for which one spouse is covered, the full deduction is allowed when your MAGI is $204,000 or less.

The annual contribution limits for both types of IRAs are the same. For 2022, you can contribute up to $6,000. An additional catch-up contribution of $1,000 is allowed if you're 50 or older.

Important

Making excess contributions over your annual limit to either type of IRA can result in a tax penalty.

Can You Put CDs in an IRA?

CDs are time deposit accounts offered by banks and credit unions. When you open a CD, you deposit a certain amount of money, which then earns interest over a predetermined maturity period. When the CD matures, you have the option of withdrawing your initial savings and the interest earned or rolling it into a new CD.

If you're opening an IRA through a brokerage account, your brokerage may offer CDs as a retirement savings option. The minimum deposit that's required, the maturity term, and the interest rate you earn will vary by CD.

The other option is to open an IRA CD at a bank. IRA CDs are CDs that are designed specifically to be held inside an IRA. Banks can offer traditional IRA CDs and Roth IRA CDs. In terms of how they differ from other bank-issued CDs, here's what sets them apart:

  • Taxation. IRA CDs follow IRA tax rules for withdrawals. For example, early withdrawals from a traditional IRA CD may be subject to a 10% tax penalty.
  • Terms. Maturity terms may be longer; for example, you may have the option of saving in a 10-year IRA CD.
  • Rates. Interest rates for IRA CDs may be higher than regular CD rates because they tend to have longer terms.

IRA CDs can be insured by the Federal Deposit Insurance Corporation (FDIC) when held at an FDIC member bank, just like other bank CDs. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution. That means they're protected in the rare event that your bank fails.

Note

Traditional IRA CDs are subject to the same required minimum distribution (RMD) rules as traditional IRAs.

Should You Put CDs in an IRA?

Putting CDs into an IRA or opening an IRA CD could make sense if you're looking for a safe, secure way to invest money for retirement. If you're holding FDIC-insured CDs, your deposits are protected up to the coverage limits. And overall, CDs are some of the safest ways to invest money because they can offer a predictable rate of return.

In terms of how much you could earn with an IRA CD, rates may be higher than other CD options. But they may not be comparable to the returns you might be able to earn with stocks, exchange-traded funds (ETFs), or other higher-risk investments. So it's important to consider what kind of risk/reward balance you're hoping to strike.

Also, consider your time frame for investing and how comfortable you are keeping some of your portfolio in CDs for the long term. For example, say you open a 10-year IRA CD that's earning a 1.5% annual percentage yield (APY) today. But within a year of opening your account, rates rise, and new 10-year IRA CDs are now offering 2%.

You could withdraw the money from your original CD and use the money to purchase a new one at the higher APY. But that could trigger a CD early withdrawal penalty and an IRA early withdrawal penalty. So even though CDs are secure, you still face a certain amount of risk where interest rates are concerned.

Laddering IRA CDs could help you to minimize this risk. With a CD ladder strategy, you'd open multiple CDs inside an IRA with different maturity terms and interest rates. This way, you have CDs continually maturing that you can then roll over if rates increase.

Tip

Some banks offer IRA Raise Your Rate CDs, which allow you to increase your rate once or twice during the maturity term to keep pace with changing rates.

Should I Put My Money in a CD or IRA?

Putting money in a CD can help you earn interest over a set maturity term, while saving in an IRA can allow you to build wealth on a tax-advantaged basis. Opening an IRA CD is something you might consider if you're interested in doing both.

What Happens When a CD Matures in an IRA?

When an IRA CD matures, you'll be able to roll it over to a new IRA CD or transfer the funds to another IRA. Opting for a direct transfer between IRAs can help you avoid any tax penalties.

What Is the Difference Between a Regular CD and an IRA CD?

Regular CDs issued by banks earn interest, but they don't offer any tax advantages because they're not subject to IRA rules. An IRA CD is a CD that earns interest and follows IRA tax rules for contributions and withdrawals.

How Are IRA CDs Taxed?

IRA CDs are taxed according to the type of IRA in which they're held. Traditional IRA CDs are taxable when you withdraw the money and early withdrawal penalties may apply. Roth IRA CDs allow for tax-free qualified distributions.

The Bottom Line

Opening an IRA to hold CDs or setting up an IRA CD may be something to consider if you want a safe investment option for retirement. You'll first need to determine what type of IRA to open based on your income and the type of tax benefits you prefer. You can then shop around to compare IRA CD rates and maturity terms to find the right fit for your savings strategy.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. "Traditional and Roth IRAs."

  2. Internal Revenue Service. "Roth IRAs."

  3. Internal Revenue Service. "IRS Announces Changes to Retirement Plans for 2022."

  4. Internal Revenue Service. "2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions if You Are NOT Covered by a Retirement Plan at Work."

  5. Internal Revenue Service. "2022 IRA Contribution and Deduction Limits Effect of Modified AGI on Deductible Contributions if You ARE Covered by a Retirement Plan at Work."

  6. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  7. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  8. Capital One. "Understanding CDs and IRA CDs."

  9. The Commercial Bank. "CDs and IRAs."

  10. Internal Revenue Service. "What if I Withdraw Money From My IRA?"

  11. Midwest BankCentre. "In-Branch CDs and IRAs."

  12. Federal Deposit Insurance Corporation. "Deposit Insurance."

  13. Internal Revenue Service. "Retirement Plan and IRA Required Minimum Distributions FAQs."

  14. Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions."