What Is an IRA CD and How Does It Work?

Saving for retirement can feel overwhelming and sometimes impossible. Between the alphabet soup of different account types, the constant ups and downs of the stock market, and the pressure of trying to make the “right” decision, it’s understandable you might feel discouraged before you even start.

If you’re looking for a low-stress, simple way to save for retirement that doesn’t require you to watch the stock market every day, an IRA CD might be a great option.

Here we’ll go through a step-by-step breakdown of what an IRA CD is, how it works, and how it could fit into your retirement savings plan with the help of Amplify’s own Community Banker, Juan Rosales. We’ll also go over how IRA rollovers can come into play when you get closer to retirement age.

What is an IRA CD? 

An IRA CD is the combination of an individual retirement account (IRA) and a certificate of deposit (CD). To understand what these two acronyms mean when grouped together, it helps to understand what they are as separate financial tools.

• A certificate of deposit is a type of savings account offered by banks and credit unions that holds your money for a predetermined, fixed period of time. That period is known as the CD term. In exchange for allowing the financial institution to hold onto your money for the term, they pay you a fixed interest rate on your money. Unlike a regular savings account, this rate will not fluctuate, and you know exactly what you’ll earn when the CD reaches its maturity date. The trade-off is you can’t take your money out without paying early withdrawal penalties.
• An individual retirement account is a tax-advantaged account designed to help you save for retirement. The IRA “wraps” your investment, giving it a tax-advantaged status.

“When these two tools are combined, you get an IRA CD—a certificate of deposit held inside an individual retirement account,” says Rosales. “So you get the predictable, guaranteed return of a CD, plus the tax advantages of an IRA. This can be a particularly appealing option for those who want stability over speculation.”

Types of IRAs: Traditional vs. Roth

When opening an IRA CD, the first decision you’ll need to make is what type of IRA you’d like to use. The two most common types of IRAs are Traditional IRAs and Roth IRAs, and which one you choose will likely come down to when you want to get your tax break.

• Traditional IRA: With a Traditional IRA, your contributions are usually tax-deductible now, allowing you to lower your taxable income as you save. The money you put aside grows tax-deferred—meaning you won’t owe taxes on those earnings until you start making withdrawals in retirement. At that point, however, you will have to pay taxes on your withdrawals.
• Roth IRA: With a Roth IRA, the tax situation is flipped. You pay taxes on the money you contribute, but when it comes time to make withdrawals at retirement, you won’t pay any taxes. If you think you might be in a higher tax bracket when you retire, a Roth could be a smart long-term move.

“Both types of IRA can hold a CD, so the best choice for you depends on your current income, your expected tax situation in retirement, and your financial goals,” Rosales advises. “If you’re not sure which type of IRA is best for you, a conversation with a financial advisor can help you decide.” 

How does an IRA CD work?

Once you decide to open an IRA CD, the process is pretty simple. You first choose a financial institution—a bank or a credit union—that offers IRA CDs, select the term you want (this can range from a few months to a few years‚ and deposit your funds. From there, you’ll earn a fixed interest rate on your money for the duration of the CD term.

When your CD reaches its maturity date, you have a few options.

“You can roll the funds into a new CD, transfer them into another type of investment within your IRA, or—if you’re at or near retirement age—you can begin taking distributions,” Rosales explains. “One important thing to keep in mind is that if you withdraw funds from a Traditional IRA before you reach age 59½, you’ll likely face early withdrawal penalties and owe income taxes on the amount you withdraw. Roth IRAs have more flexibility when it comes to contributions, but if you withdraw funds early, you could still face penalties.”

The thing that sets IRA CDs apart from other retirement vehicles is their simplicity. There is no market risk to worry about, and no complex strategy to manage. The IRA offers a fixed interest rate, a defined timeline, and a predictable outcome. For people who prefer to have peace of mind over maximum growth potential, the trade-off can make good sense.

IRA Rollovers: A Smart Move as Retirement Approaches

As you get closer to retirement, it becomes more and more important to protect what you’ve saved. That’s when IRA rollovers and IRA CDs can work well together.

An IRA rollover is the process of moving funds from one retirement account into an IRA. This is usually done when you leave a job and want to transfer your 401(k) balance or consolidate retirement accounts from multiple employers. If done correctly, a rollover is not a taxable event, which means you can move the money without paying any taxes.

For those who are five to ten years away from retirement, rolling over a 401(k) or other retirement account into an IRA CD can be a smart financial strategy. Instead of leaving your savings exposed to market volatility right before you need access to the money, an IRA CD locks in a guaranteed rate of return for a specific period. You know exactly what your balance will look like when your CD matures, a fact that can make retirement planning a lot less stressful when you’re nearing the end of your working years.

Some saving for retirement use a ladder strategy, which involves putting money into multiple IRA CDs with staggered maturity dates. With this strategy, you’ll have money becoming available at regular intervals without having all your cash locked up at once. It’s a practical way to balance stability while also growing your cash reserves as retirement approaches.

Start Building Your Retirement Savings Today

“An IRA CD isn’t a get-rich-quick solution, but that’s not its purpose,” reminds Rosales. “Instead, your retirement savings has a safe, steady place to grow with the tax advantages of an IRA and the reliable, guaranteed return of a certificate of deposit.” Whether you’re only just starting to think about retirement savings, or you’re looking for a stable place to park funds you’ve already saved up, Amplify Credit Union is here to help. Our wealth management team can walk you through your IRA CD options, answer any questions you might have about rollovers, and help you find the best fit for where you are today and where you want to be tomorrow.