What Is An IRA CD?

An IRA CD is an individual retirement account invested in certificates of deposit (CDs). This low-risk retirement savings option combines the tax advantages of an IRA with the stability and predictability of a CD.

By investing your IRA funds in CDs, you can lock in a fixed interest rate for a set term, typically ranging from a few months to several years. This makes IRA CDs a smart choice for conservative investors who are looking to protect their principal while still earning a solid return.

What is an IRA CD and how does it work?

IRA CDs combine the features of two popular savings vehicles: IRAs and CDs.

An IRA is an individual retirement account that can be invested in different assets, such as stocks, bonds, mutual funds — and CDs. Unlike other types of IRAs, IRA CDs come in term lengths like other CDs, ranging from three months to several years, depending on the term.

Read more: Best IRA CD rates

You can open IRA CDs at banks, credit unions and brokerage firms. There are two types of IRAs: a traditional IRA or a Roth IRA. The key difference between these two IRA accounts is when they are taxed.

Traditional IRA contributions are generally tax-deductible, and your contributions are taxed when you withdraw the money. Roth IRA contributions cannot be deducted from your annual income, but they are not taxed when you withdraw the funds.

Read more: Roth IRA vs. traditional IRA: Which is better for you?

Generally, IRA CDs earn a fixed annual percentage yield (APY). The longer the CD term, the higher the interest rate tends to be. However, it’s important to consider your liquidity needs before committing to a longer-term IRA CD, as early withdrawals may trigger penalties from both the bank and the IRS.

Expert tip: When to choose an IRA CD for retirement

I typically recommend IRA CDs for retirees or near-retirees who want to protect a portion of their retirement savings from market volatility. For younger investors with decades until retirement, the lower returns of CDs compared to other investments (like stocks) may lead to significantly less growth over time. This can potentially cost you hundreds of thousands in retirement savings.

— Hanna Horvath, CFP, Managing Editor, Deposits

CD vs. IRA CD

There are a few key differences between an IRA CD and a regular CD.

• The amount you can invest: IRA CDs have contribution limits. If you’re under age 50 and earn taxable compensation, you could contribute up to $7,000 in 2025. If you’re 50 and over, you can contribute an extra $1,000. With a regular CD, you can generally deposit as much as you want when you open the account. Just keep in mind your bank might have limits, and you’ll want to be within FDIC limits and guidelines to make sure your deposits are fully insured.
• Bank withdrawal penalties: Most CDs come with early withdrawal penalties, which will eat away at any gains you may make. These penalties are generally set by the bank and can range depending on the term.
• IRS penalties: With an IRA CD, early withdrawal might pinch you twice. Not only will you have to pay an early withdrawal penalty, but the IRS might too. Tax implications include a 10 percent penalty on retirement funds drawn before you are 59½ years old. This makes an early withdrawal from an IRA CD an expensive move.

Read more: Is an IRA certificate of deposit (CD) tax deductible?

Traditional vs. Roth IRA CDs

When choosing an IRA CD, you’ll need to decide between a Traditional or Roth IRA CD. Each has distinct tax advantages and implications:

Who should get an IRA CD?

IRA CDs are best suited for savers who are retired or close to retirement because they are very low risk. The interest gains are fixed-rate and tax-deferred.

“A person at that point of their investment career needs to focus on stability and preservation of the capital they have built up,” says Elliot Pepper, CPA, CFP®, co-founder of Maryland-based Northbrook Financial. “A CD, by its very definition, is designed to promote that. It also provides a steady, reliable and known stream of income.”

IRA CDs are not really a good fit for younger workers because they will not deliver the returns investors can get over time by putting money into higher-yielding assets like stocks, bonds and mutual funds.

“The primary variable I think about is time,” says Pepper. “A young person has time, whereas someone close to retirement doesn’t. An IRA CD is less volatile and returns are lower over time — lower than stocks.”

Learn more about retirement account options. 

Deciding between a Traditional and Roth IRA isn’t always straightforward. Factors like your current tax bracket, expected future tax bracket and when you’ll need the money should all play a role in your decision. Compare all available retirement account types to determine the best fit for your financial goals.

Pros and cons of IRA CDs

Anytime you’re considering investing your money in something, you need to weigh the potential benefits and drawbacks. Here’s a look at the main pros and cons of opening an IRA CD.

Pros

• Guaranteed returns: Investing can be uncertain because the market fluctuates. But CDs are generally fixed-rate investments, so you can be certain in advance of exactly how much you will earn.
• Insured: IRA CDs are typically insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) up to $250,000 per depositor, per account.
• Low fees: Unlike some other retirement investments, IRA CDs don’t typically charge annual fees or expense ratios.

Cons

• Lower growth potential: While IRA CDs offer stability, their returns may not keep pace with inflation over the long term, potentially eroding your purchasing power in retirement.
• Early withdrawal penalties: Withdrawing funds from an IRA CD before maturity can trigger steep penalties from both the financial institution and the IRS.
• Limited liquidity: Once you invest in an IRA CD, your money is typically locked up until the CD matures, which can be problematic if you face an unexpected expense or investment opportunity.

How to open and find the best IRA CDs

Opening an IRA CD is easy. Here are the steps to follow.

1. Shop around. Banks, credit unions and big brokerages offer IRA CDs, but you should shop around. The best IRA CDs may not be offered at the biggest banks. Online banks typically offer the best yields because they do not have brick-and-mortar branches to maintain. Regardless of where you choose, make sure the bank is FDIC-insured (or NCUA-insured if it’s a credit union) to keep your funds safe.
2. Choose the terms that are right for you. Determining the IRA CD term is extra important, since the penalties for early withdrawal are steep. Although no one can predict the future, it’s worthwhile to consider how long you can go without needing access to the money you plan on putting into an IRA CD.
3. Make the opening deposit. Each financial institution has its own minimum opening deposit requirements. You can typically fund a CD via electronic transfer or by mailing in a check.

Consider laddering your IRA CDs by splitting your investment across multiple CDs with different maturity dates. This strategy offers both liquidity and the potential to lock in higher returns. As each CD matures, you can either withdraw the funds if needed or reinvest them into a new CD at the end of your ladder.

The bottom line

In combining the tax advantages of an IRA with the fixed rates of a CD, IRA CDs offer a unique way to grow your nest egg.

Make sure you consider factors like your age, timeline and risk tolerance before committing to an IRA CD. Younger investors with a longer time horizon may be better served by higher-growth investments, while those nearing retirement may benefit from the stability and guaranteed income an IRA CD can provide.