Should You Put CDs in an IRA?

Opening an individual retirement account (IRA) is one way to build wealth for the long term. An IRA can hold different types of investments, including certificates of deposit (CDs). CDs offer a safe, secure way to grow your money—but does it make sense to keep them in an IRA? It can, though putting CDs in a retirement account may not suit every investor.

Individual Retirement Account (IRA) Basics

An IRA is a tax-advantaged account that's designed specifically for retirement savings. There are two basic types of IRAs to choose from: Roth and traditional.

A Roth IRA is funded with after-tax dollars and allows for 100% tax-free qualified distributions in retirement. Your ability to contribute to a Roth IRA is based on your tax filing and income. Here are the Roth IRA contribution income phase-out limits for 2023 and 2024.

Traditional IRAs are funded with pretax dollars, and contributions may be tax-deductible. Your income does not affect your ability to contribute to a traditional IRA. The IRS does, however, consider your modified adjusted gross income (MAGI) and whether you're covered by a retirement plan at work for determining how much you can deduct. If you're married, the IRS also takes into account whether your spouse is covered by a plan at work.

Full deductions are allowed if you're covered by a plan at work and meet certain income thresholds. In the table below, those whose income falls below the phase-out ranges can take full deduction. Those whose income falls between each phase-out range may take partial deduction. Those whose income falls above the phase-out range may not take any deduction. For 2023 and 2024, these thresholds are below.

If you're not covered by a plan at work and file single, head of household, or as a qualifying widow(er), you can deduct the full contribution, regardless of income. The same is true if you're married and your spouse is not covered by a workplace plan either. For married couples filing jointly for which one spouse is covered, the full deduction is allowed when your MAGI is $218,000 or less (increasing to $230,000 in 2024).

The annual contribution limits for both types of IRAs are the same. For 2023, you can contribute up to $6,500. An additional catch-up contribution of $1,000 is allowed if you're 50 or older. For 2024, you can contribute up to $7,000 with the additional $1,000 catch-up contribution.

Can You Put CDs in an IRA?

CDs are time deposit accounts offered by banks and credit unions. When you open a CD, you deposit a certain amount of money, which then earns interest over a predetermined maturity period.When the CD matures, you have the option of withdrawing your initial savings and the interest earned or rolling it into a new CD.

If you're opening an IRA through a brokerage account, your brokerage may offer CDs as a retirement savings option. The minimum deposit that's required, the maturity term, and the interest rate you earn will vary by CD.

The other option is to open an IRA CD at a bank. IRA CDs are CDs that are designed specifically to be held inside an IRA. Banks can offer traditional IRA CDs and Roth IRA CDs. In terms of how they differ from other bank-issued CDs, here's what sets them apart:

• Taxation. IRA CDs follow IRA tax rules for withdrawals. For example, early withdrawals from a traditional IRA CD may be subject to a 10% tax penalty.
• Terms. Maturity terms may be longer; for example, you may have the option of saving in a 10-year IRA CD.
• Rates. Interest rates for IRA CDs may be higher than regular CD rates because they tend to have longer terms.

IRA CDs can be insured by the Federal Deposit Insurance Corporation (FDIC) when held at an FDIC member bank, just like other bank CDs. The current FDIC coverage limit is $250,000 per depositor, per account ownership type, per financial institution. That means they're protected in the rare event that your bank fails.

Should You Put CDs in an IRA?

Putting CDs into an IRA or opening an IRA CD could make sense if you're looking for a safe, secure way to invest money for retirement. If you're holding FDIC-insured CDs, your deposits are protected up to the coverage limits. And overall, CDs are some of the safest ways to invest money because they can offer a predictable rate of return.

In terms of how much you could earn with an IRA CD, rates may be higher than other CD options. But they may not be comparable to the returns you might be able to earn with stocks, exchange-traded funds (ETFs), or other higher-risk investments. So it's important to consider what kind of risk/reward balance you're hoping to strike.

Also, consider your time frame for investing and how comfortable you are keeping some of your portfolio in CDs for the long term. For example, say you open a 10-year IRA CD that's earning a 1.5% annual percentage yield (APY) today. But within a year of opening your account, rates rise, and new 10-year IRA CDs are now offering 2%.

You could withdraw the money from your original CD and use the money to purchase a new one at the higher APY. But that could trigger a CD early withdrawal penalty and an IRA early withdrawal penalty. So even though CDs are secure, you still face a certain amount of risk where interest rates are concerned.

Laddering IRA CDs could help you to minimize this risk. With a CD ladder strategy, you'd open multiple CDs inside an IRA with different maturity terms and interest rates. This way, you have CDs continually maturing that you can then roll over if rates increase.

The Bottom Line

Opening an IRA to hold CDs or setting up an IRA CD may be something to consider if you want a safe investment option for retirement. You'll first need to determine what type of IRA to open based on your income and the type of tax benefits you prefer. You can then shop around to compare IRA CD rates and maturity terms to find the right fit for your savings strategy.