What is a IRA CD?

By Joseph Nicholson

  • Overview

    What is a IRA CD?
    Saving for retirement is one of the most important investment considerations every individual has to make. And, with a wide range of options, the decision can be difficult. Growing slowly but steadily, IRA CDs are a safe way to plan for the future, and an excellent part of any diversified retirement portfolio.
  • The Facts

    A Certificate of Deposit (CD) is a relatively safe investment made to a bank or other financial institution in return for repayment at a set maturity date at interest. An Individual Retirement Account, or IRA, is an investment account designed to encourage saving for retirement by deferring capital gains taxes, and in some cases income tax as well, until the account holder reaches retirement age. An IRA CD, sometimes also called a CD IRA, is a CD investment vehicle held in a IRA account or an IRA account invested primarily in CD-type instruments.
  • Identification

    CDs are typically offered in denominations of $10,000, $50,000 and $100,000 with maturities of 6 months, 1 year, 5 years or more, but with an IRA CD the initial investment can be as low as $1,000, with contributions allowed at any time. Because the recipient of an IRA CD investment uses the funds in whatever way they see fit, they can offer a wide range of features to the account holder, who generally earns more than on a typical savings account, but less than most other higher risk instruments. As with any IRA, the funds in an IRA CD are subject to stiff penalties if withdrawn before retirement age.


  • Time Frame

    Individual CDs will usually mature before an IRA owner is ready to withdraw the funds, so most IRA CDs can be configured to automatically renew into a new CD. Most depository institutions will notify the account holder when the CD is approaching maturity and give them the option to modify the terms of their investment.
  • Features

    Because the funds of an IRA CD are locked into the account for much longer than a non-IRA CD, the financial institution can offer shorter maturity dates and better terms than they might otherwise. One such feature is the Step Rate IRA CD, which automatically increases its earning rate every six months regardless of market conditions. On the other hand, convertible certificates allow investors to take advantage of higher rates if they prevail. As with most CDs, so long as they are made with an FDIC insured depository institution, IRA CDs are backed by the US federal government up to $100,000 or the current FDIC limit.
  • Considerations

    However, because the funds in an IRA CD cannot be withdrawn before retirement without considerable penalty, they are really only ideal for wage or salary owners that can make a lump sum contribution and afford not to touch it for literally decades. Because they are relatively safe, they are also optimal for older workers and those who will need to withdrawal them soon and who cannot afford to be exposed to market risk that can wipe out or substantially reduce a retirement nest egg.
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