What Is an IRA CD and Why Buy One?  (2024)

For people with low tolerance for risk, or retirees who want to guarantee a fixed return, buying certificates of deposit in a retirement account can provide peace of mind—and a 5% or better of tax-deferred return.

When you open a CD, you agree to lock that money up for a designated time—from a month to five or more years—in exchange for interest payments. CDs are great for earmarking money for a future expense—college tuition or property taxes, for instance, but you’ll need to pay taxes on that interest income the year they mature. That’s why IRA CDs can be great for retirement planners, or people already in retirement: You get predictability plus tax advantages.

By holding CDs in an individual retirement account, or IRA you defer paying taxes on your earnings until you withdraw the money at 59 and ½ or older. (Some banks also offer Roth IRA CDs, which are funded by after-tax dollars and allow for tax-free withdrawals in retirement.)

Why buy CDs in an IRA?

The biggest benefit of a CD is it gives you a guaranteed return along with FDIC-backed assurance that you won’t lose the principal you invest. While the yield you can earn might not be as high as what you could accrue by investing in equities or corporate bonds, the security and predictability is worth the trade-off for some.

Financial experts say, IRA CDs are a good option for retirees who decide to keep a certain amount of their portfolio in cash; for instance, to take required minimum distributions, pay taxes or undertake a home renovation. You can get a good return on your money until you need it—without running the risk of having to sell stocks if you need funds during a market downturn.

“The optimal use cases are if you’re going to get better returns relative to the risk than other investments,” says Chris Nichols, director of capital markets at SouthState Bank. “If you do need to hold cash or cash-like securities in your IRA, bank CDs have a place.”

Because CD rates are fixed, though, you need to make sure your investments won’t be eroded by inflation, says Nicole Birkett Brunkhorst, a certified financial planner at U.S. Bank Wealth Management.

“Just because it’s stable and offers a specific rate of return it shouldn’t be looked at in a vacuum,” she says. “It really needs to align with their overall financial planning.”

Best IRA CD rates

The top IRA CD rates are nearly as high—within about a quarter of a percentage point—as the top APYs, or annual percentage yields, we’ve found for traditional CDs.

Most of the top IRA CD rates today fall around the one-year maturity range. For instance, right now on Deposit Accounts, which tracks rates at more than 11,000 banks and credit unions, there are 12- and 13-month IRA CDs offering APYs of 5.35% from Eastman Credit Union, Founders Federal Credit Union and First Bank of Central Ohio.

But while the best IRA CD rates tend to be offered by smaller institutions, there are a couple of things to keep in mind. Unlike ordinary CDs, some institutions might require you to open an IRA CD in person, so it’s smart to consider banks and credit unions with branches in your location. In particular, note that credit unions sometimes require you to live, work, go to school or worship in an area where they have branches.

More so than with regular CDs, the added complexities of moving IRA CD money between banks—a function of Internal Revenue Service regulations around IRA contribution limits and rollover windows—makes these less effective tools for chasing the absolutely maximum yield. Look beyond promotional IRA CD rates to find an institution that offers decent returns on a steady basis.

For example, here are a few current IRA CD rates from large online banking institutions:

• Alliant Credit Union: 5.15%; 12-month term
• Synchrony Bank: 5%; 14-month term
• Discover Bank: 4.7%; 12-month term
• Ally Bank: 4.5%; 12-month term

While you can buy CDs through a brokerage account where you might already have an IRA, brokered CDs are somewhat different—and have some unique features and drawbacks—compared with CDs you buy directly through a bank or credit union.

Much like ordinary CD rates, IRA CDs are influenced by the interest rate environment. The Federal Reserve’s campaign to quash inflation with elevated interest rates has prompted banks to raise the returns they offer for customer deposits on CDs as well as high-yield savings accounts and money-market accounts. When the Fed begins lowering rates, yields on CDs and other savings vehicles will decline as well.

How IRA CDs differ from non-IRA CDs

The process of opening a CD—IRA or traditional—is similar to opening a checking or savings account. Whether you do it online or in person at a branch, you will have to submit I.D. and personal information such as contact information and your Social Security number. If you plan to open a CD at a credit union, you will have to become a member first.

There are some differences, however, when it comes to rolling over and cashing out an IRA CD. The added complexity is a function of IRS rules around when, how and how much you can contribute to and withdraw money held in a tax-preferred retirement-savings account.

Contribution limits

While IRA CDs function like traditional CDs, there are some additional limits because of the tax regulations around retirement account contributions.

There’s no limit to how much money you can keep in a CD (although we advise staying within the $250,000 limit for FDIC protection of your deposits). IRAs, however, have annual contribution limits—that’s $7,000 in 2024, or $8,000 if you’re age 50 or older. So if you don’t already have cash in your IRA—or investments you’d like to sell—you cannot put more than the contribution limit toward a CD.

Keep in mind, those limits apply to the total of all the IRAs you have. So if you contribute to an IRA CD with a bank, make sure to factor in contributions to IRAs where you might keep stocks and bonds.

Rollover limits

A word of caution for yield-chasers: If you comparison shop and switch institutions every time you have a CD reach maturity with the goal of getting the very best rate available at that moment, IRS regulations make this more challenging with an IRA CD.

The IRS limits the number of IRA rollovers you can make, limiting you to one rollover within each 12-month period, regardless of how many different IRAs you have. This means to change institutions you have to coordinate the timing of your CD maturities accordingly.

If you conduct an indirect rollover—that is, a rollover in which you take custody of the funds and perform the transfer from one institution to another—you also have to be mindful of the IRS’s 60-day window to reinvest pretax funds into another qualified retirement account. Miss this deadline and the IRS treats that money as a taxable distribution.

Initiating a trustee-to-trustee transfer—where the financial institutions handle it—can mitigate some of this risk, but this would entail timing the opening of your new IRA to coordinate with your existing CD’s grace period—the time during which a bank will allow you to retrieve your money after maturity—which could be difficult, given that some grace periods can be less than two weeks.

Two different early withdrawal penalties

With the exception of no-penalty CDs offered by some banks, taking money out of a CD before the maturity date will cost you. Banks impose early withdrawal penalties, which vary based on the length of the CD term and are typically a percentage of the interest you would have earned, which can be as high as 100%—that is, your entire interest earnings.

Meanwhile, IRS rules generally require you to wait until the age of at least 59½ to take distributions from an IRA or other retirement account funded with pretax dollars. If you “break” or cash out at maturity an IRA CD and you’re younger than 59½, the IRS views this as a taxable distribution. This means you have to pay income tax at your ordinary rate on that money, as well as paying a 10% early-withdrawal penalty.

How we picked

We highlighted CDs with minimum deposits of $1,000 or less as aggregated by Deposit Accounts and available as of May 23, 2024. We found that IRA CDs might have higher minimum balances than ordinary CDs, which is important to consider in the context of annual IRA contribution limits.

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