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Basics of the CD IRA

Is a CD IRA Right for Me?


A CD IRA is money invested in a bank product within a retirement account. So it's a combination of two things: a certificate of deposit (CD) and an individual retirement account (IRA). Those two things don't necessarily have to go together (you can have a CD outside of an IRA), but some people choose to invest with CD IRAs. Learn more about how they work and who should use them.

What are the Parts of a CD IRA?

The IRA is a type of account with certain tax benefits and features. You might think of it as a tax-wrapper around your money. Within that wrapper, you can use any number of investments, including CDs.

These accounts are designed for retirement savings. The government gives you certain incentives to use them as such, and in exchange you might get penalized if you pull funds out before retirement. Some people think that CDs are the only investments available inside of IRAs, but you can use other investment strategies in an IRA if your account is not held by a bank or credit union.

A CD is a bank product. You promise to keep your money invested for a certain amount of time, and they pay you a little bit more (because they know they can use the money for longer). You can use CDs inside or outside of retirement accounts.  

Benefits of a CD IRA

The main reason to use a CD IRA is to grow your money safely. If your money is FDIC insured, you won’t lose money using CD IRAs if your bank fails. However it is possible to walk away with less than you deposited if you cash out of your CD before it matures (or "break"). To ensure that you're protected, verify that your accounts are below FDIC insurance dollar limits.

Since retirement funds will presumably be invested for a long time (unless you’re already retired - lucky you), CD IRAs pay a little bit more than other bank products like savings accounts and money market accounts. The higher interest rate or APY means you’ll end up with more spending money in retirement.

CD IRA Drawbacks

Unfortunately, CD IRA accounts are not perfect. You have to lock your money up to earn higher rates, and you may not be able to do so. You can manage the problem by using CD ladders and planning ahead.

Also, CD IRA investments may not earn as much as other investments over long periods of time. If you’re young and you have a long time horizon, you should at least investigate other investments (while keeping inflation in mind) before you use a CD IRA. Work with a financial planner to determine what’s best for your situation.

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