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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. CDs and IRAs do not always have to go together, but some people choose to invest with CD IRAs. Learn more about how they work and who should use them.

What is a CD IRA?

A CD IRA combines two things:

  • An Individual Retirement Account (IRA), and
  • A Certificate of Deposit
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. Many people think that CDs are the only investments available, but you can use other investment strategies in an IRA. 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 have more certainty about when you’ll take the money out). You can use CDs inside or outside of retirement accounts. When you use a CD inside of an IRA, you’ve got a CD IRA.

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. You have to make sure to keep your accounts below certain dollar limits, but you can count on a government backed guarantee if your bank fails.

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. 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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