What Is an IRA CD and Is It Right for Your Retirement Plan?
By Zac Pollock, CEO
When you hear people talk about investing for retirement, the discussion usually centers around two things: stocks and bonds.
There is a third option, though, which may offer a higher fixed rate of return than an IRA savings account: an IRA CD.
What is an IRA CD?
A certificate of deposit, or CD, is basically a fixed-rate investment where you invest with a credit union or bank for a fixed number of months and receive a guaranteed fixed rate of return on the investment. For credit unions, these are also sometimes called share certificates.
The rate of return generally varies by the number of months and the amount of the initial investment.
An IRA CD is basically just like a normal CD, but with the tax advantages of an IRA.
Traditional vs. Roth IRA CD
If the IRA is a traditional one, the account is funded with pre-tax dollars just like a 401K, deferring the taxes on the money until it is withdrawn. For many people, contributions to a traditional IRA are tax-deductible just like contributions to an employer-sponsored 401K.
If the CD is part of a Roth IRA, the account is funded with post-tax dollars, so there are no present-day tax benefits. But distributions in retirement are tax-free, meaning qualified withdrawals in retirement are tax-free.*
When an IRA CD Might Be Right for You
If You Are Close to Retirement
For those close to retirement, an NCUA or FDIC-insured CD may provide more security (up to insured limits) while generating a rate of return superior to a standard savings account.
Those Looking to Diversify
IRA CDs can offer a safer complement to riskier but potentially higher-yield stocks and mutual funds.
Those Rolling Over an Old 401K
When leaving a job that had a 401K, the question becomes what to do with it. If you have more than $7,000 vested in the account, you can sometimes leave it in the former employer’s 401K, though policies can vary by employer. That number used to be $5,000 before 2024, but has since been increased. The problem then becomes logistical, ensuring that you maintain control of the account through any changes that the employer might make, such as switching to a new provider.
The simplest solution is to conduct a rollover to an IRA under your control. Credit union representatives can walk you through the process of doing a rollover in a way that avoids tax implications. Be careful when doing a rollover. Even something as simple as who the rollover check is made out to can trigger tax penalties.
One Drawback to an IRA CD
In general, don’t put money into an IRA CD if you have not reached retirement age and you think you might need the funds before the end of the CD period. That is because you may face both a 10% early withdrawal penalty from the IRS (if under 59 ½ years old and no exception applies) and an early withdrawal penalty from the CD issuer.
Interested in Learning More About an IRA CD?
If you are considering a Traditional or Roth IRA CD, First Class Community Credit Union is here to help guide you through the process, whether you are adding new money to your retirement savings or rolling over a 401(k). Contact us to learn more.
This article is provided for general informational and educational purposes only and does not constitute tax, legal, or investment advice. First Class Community Credit Union does not provide tax or legal advice. Please consult a qualified tax professional, financial advisor, or attorney regarding your individual situation. Early withdrawals from an IRA may be subject to income taxes and a 10% federal tax penalty unless an exception applies. Deposits are federally insured by the NCUA up to applicable limits. Rates and terms are subject to change without notice.
*Account must be open 5 years, and the account holder is 59 ½ or older.