As some of you may be nearing retirement, you’re thinking about maximizing your retirement funds in the home stretch. IRAs (individual retirement accounts) are a great strategy for your retirement savings and with the current state of CD interest rates (4.50% and above) placing your IRA funds in a CD (Certificate of Deposit) allows you to earn an attractive risk-adjusted return. Opening an IRA CD provides you with a tax-advantaged, low-risk, guaranteed rate of return, therefore giving you peace of mind that your retirement funds are safe and secure.
But don’t wait to open or add to your IRA CD. Today’s great rates may be gone by April 15, the Tax-Day deadline to contribute to your IRA for the prior year.
What is an IRA CD?
An IRA allows you to create a retirement fund in which you can grow funds in stocks, bonds, or in this case, CDs. You can either pay income taxes on your contribution before depositing into an IRA account (Roth IRA) or when you withdraw funds from the IRA account (Traditional IRA) for retirement. When you open an IRA CD, your IRA (retirement funds) benefits from the advantages of a CD – setting a fixed term and a fixed interest rate, thereby locking in a higher rate of interest than a savings account and many other investments. The rate stays locked in for the CD’s initial term even if interest rates go down. Once your IRA CD reaches its maturity, you not only have the initial deposit but the interest you’ve earned. Plus, with a CD there isn’t a risk of losing your principal (contribution amount) as it exists with stocks or other investments unless you withdraw the funds from the CD prior to the maturity date and your financial institution charges you a penalty fee.
Note: There are income qualifications and limitations as well as contribution limits for opening IRAs, so it’s advised to consult with a financial advisor.
Why Should I Open an IRA CD?
An added benefit is that if you open your IRA CD at a bank or credit union, your IRA funds will be insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Association) for up to $250,000. The guaranteed fixed rate and insurance protection are safeguards to protect your IRA funds for when you need them the most – retirement!
Why Open Now?
Despite rates holding steady at the January Federal Reserve meeting, observers believe we could continue to see rate cuts in 2025 as the Fed noted that “economic activity has continued to expand at a solid pace, but the economic outlook is uncertain.” According to CNET, “Pausing rates allows the Fed to see how factors like the new administration’s policies affect inflation and other economic indicators. That’s good news for savers who can still take advantage of certificate of deposit and savings account rates as high as 4% annual percentage yield, or APY”.
With that being the case now is the time to get the best cd rates or to contribute to a 2024 or 2025 IRA CD account. Many banks and credit unions are still offering 4.50% or higher rates on their CDs. Act now, before rates go down. Locate your financial institution of choice, choose your IRA plan type (Traditional or Roth), and open an IRA CD account to lock in a competitive fixed CD rate. IRA funds need to be deposited before Tax Day (April 15, 2025) for a 2024 IRA contribution. You can also deposit your 2025 IRA contribution early (any time prior to April 15, 2026).
Pros and Cons of IRA CDs
It’s important to know that not all financial institutions offer IRA CDs, but when you do find an available opportunity, here are a few things to consider before you open an IRA CD account:
| PROS | CONS |
| Secure Returns: An IRA CD offers predictable, guaranteed returns compared to stocks, bonds, and other savings accounts. This provides the IRA accountholder with the peace of mind of knowing how much they will earn at the CD maturity. This helps them plan more accurately. | One-Time Deposit: IRA CDs allow you to only contribute a one-time deposit that will stay in the account during its term (unless you open an add-on CD). You are allowed an annual maximum IRA contribution of $ $7,000 or $8,000 if you’re 50 or older for tax year 2024. |
| Generally Higher Interest Rates: CDs typically pay higher rates than savings and many other investments. | Limitations: You are limited to how much you can contribute to an IRA annually |
| Tax Advantages: IRA CDs do not require you to pay taxes on interest earned during the tax year unless you withdraw funds. And, for a Roth IRA CD, your interest may be tax-free if you meet Roth IRA withdrawal rules. You may also be able to deduct your IRA annual contribution if you meet the Traditional IRA deductibility rules. Note: Please consult your tax advisor to make sure you’re eligible to deduct contributions. | Accessibility: The purpose of IRA Accounts is to save for retirement; therefore you will not have access to your funds until age 59.5 without incurring an IRS penalty. Investing your IRA funds in an IRA CD comes with a CD maturity date which may not allow you to withdraw funds until the CD matures without early withdrawal fees. |
| No to Low Fees: CDs typically do not require any setup or maintenance fees, but you can incur an early withdrawal penalty fee if you withdraw funds before your CD matures. | Fees: Depending on the financial institution, you can incur early withdrawal fees if you take out funds before the CD matures. You may also pay a 10% IRS penalty if you withdraw from an IRA before age 59.5. You can be charged both fees if you withdraw before the IRA CD matures and before you turn 59.5. Some financial institutions may charge set-up fees, annual fees, or closing fees for the IRA. |
Final Thoughts from Our Ratewatchers
An IRA CD is a great way to protect your retirement savings in a risk-free account that offers competitive rates and tax-deferred growth. Consider what type of IRA (Roth or Traditional) is ideal for you based on your income and preferred tax benefits and find the term to best help you reach your retirement savings goals.
Disclaimer: This is not intended as tax or legal advice. Please consult your tax advisor or financial planner to understand how these topics may affect your individual financial situation.
FAQs
What is an IRA CD?
An IRA CD is a retirement fund that provides you with a tax-advantaged, low-risk, flexible cash flow, with generally higher returns
Why should I open an IRA CD now?
There are four reasons why you should open an IRA CD:
1. To save for retirement and earn tax-deferred or tax-free interest.
2. To obtain tax advantages on your 2024 tax return by making your annual Traditional IRA on your 2024 tax return.
3. To take advantage of current high CD rates.
4. The low to no risk of a CD. Open your IRA CD before Tax Day (April 15, 2025) and before CD rates potentially drop in 2025.
Note: IRA contributions can be made any time from Jan 1, 2025, to April 15, 2026, and apply to 2025 IRA contributions.
