Planning towards your future and saving towards retirement is important for people of all ages. 401(k)s are very popular and standard when doing so.
If this account type is not enough, an individual retirement account or IRA is a tool you can use to save money.
IRA’s allow you save for retirement without going through your employer. This type of investment is usually considered to have low risk, because its rates do not rise and fall with the market.
Making it perfect for a long-term retirement account. IRAs, 401(k)s and IRA CDs are three options to save for retirement, but there are many other possibilities on the market.
In this post, we will discuss in more detail as to what an IRA CD is so continue reading below!
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| IRA CD Term | APY Rate |
|---|---|
| 3-Month Term | 2.00% APY |
| 6-Month Term | 3.70% APY |
| 9-Month Term | 3.80% APY |
| 12-Month Term | 4.00% APY |
| 18-Month Term | 3.80% APY |
| 24-Month Term | 3.50% APY |
| 30-Month Term | 3.40% APY |
| 3-Year Term | 3.40% APY |
| 4-Year Term | 3.40% APY |
| 5-Year Term | 3.40% APY |
| 7-Year Term | 3.40% APY |
| 10-Year Term | 3.40% APY |
What Is an IRA CD?
An IRA CD is the combination of the two bank accounts. An IRA where all the money is invested in certificates of deposit (CDs).
The rate you receive when you open the IRA CD will tell you how much your money will earn during the time it is invested. This can help those nearing retirement plan out a savings strategy.
A CD is an account that offers a higher interest rate than a savings or checking account. However, your money is locked in the CD for a certain amount of time.
If you withdraw money before the end of the term, you will have to pay penalties.
An IRA is a tax-advantaged retirement account that allows you to save and invest your money in a number of different ways. The IRA itself is not an investment.
It is a place for you to put your investments in. Many people use IRA funds to invest in stocks and bonds but you could also put it into money market accounts or CDs, which is where the IRA CD’s come into play.
Which CDs Can You Use in an IRA CD?
You can use any CD as part of an IRA. So if you’re looking to open an account, you should consider comparing CD terms and rates.
Some banks have CDs that are designed specifically for retirement if this is what you are looking for.
However, these CDs usually have term lengths of 10 years or more and are also likely to have higher yields and higher minimums than a CD with a shorter term.
Pros of Using an IRA CD
IRA CDs allows you to invest your money in a secure way. If you open an IRA CD at a bank backed by the Federal Deposit Insurance Corp. (FDIC), up to $250,000 will be protected by the U.S. government if your bank goes sour.
CD interest rates do not fluctuate with the market. This certainty can help you plan your retirement savings because you know exactly how much you’ll earn from a CD. A CD is also a straightforward investment tool.
Investing in an IRA CD is easier and less time-consuming than designing and managing your own plan. You won’t face management fees either with CD’s.
Cons of Using an IRA CD
Although the return on CD’s are predictable, they provide a relatively small return. With rates that usually fall between 1% and 2%, a CD’s rate of growth is low that inflation will outpace it.
If your retirement investments are mostly in an IRA CD, you won’t make as much as you would from diverse stocks, bonds and other investment options.
If you withdraw money from a CD before it reaches the end of it’s term, you will have to pay an early withdrawal penalty. The penalty will vary by CD and financial institution.
IRA CD is also subject to the same IRA contribution limits. You will also pay the same taxes and penalties that you would owe for early withdrawal from an IRA.
CDs require a minimum investment which makes them a bad choice for people who don’t have enough to pay that minimum.
Who Should and Should Not Invest in an IRA CD?
IRA CDs are great for low-risk investors who want security against initial capital and a guaranteed yield.
If you will retire soon or are already retired, you may want to move some investments into an IRA CD.
Because IRA CDs has a low return, they are not ideal for younger investors or people who are just now starting to save for retirement.
Individuals who have decades before they retirement should have a more a diverse portfolio.
You should also avoid an IRA CD if you will need to use the money that you invest. Withdrawing money early from a CD is not a good idea because of the early withdrawal penalties.
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Bottom Line
Those who are close to retirement or already retired, you should consider using IRA CDs. However if you still have a long time before you retire, you may not want to use an IRA CD.
Consider your specific situation, goals and needs before putting your money into an IRA CD.
We hope you learned a little more than you already knew through this post.
If you’re looking or interested in more posts like this, check out our full list of Best Bank Promotions for more options as well as our list of bank guides that might answer any questions you have!
