IRA CDs vs. IRA savings accounts: What’s the difference?

The world of individual retirement accounts (IRAs) can be confusing, even for experienced savers. That’s because there are different types of IRAs. There are also many ways you can save and accumulate more money within them. Here, we take a look at two IRA savings products for every retirement saver to consider: IRA certificates of deposit (CDs) and IRA savings accounts.

Simply put, an IRA is a tax-advantaged account designed to help you save for retirement. You have the freedom to customize your IRA holdings according to your individual needs.

IRA CDs and IRA savings accounts can provide you with the safety of steady returns and the tax advantages of IRAs. Whether you’re working with a financial professional to craft your retirement strategy or going the DIY route, it helps to know the differences between these two options.

First things first: Choosing your type of IRA

You can open IRA CDs and IRA savings accounts within either a Traditional IRA or a Roth IRA. Before we dive into the differences between IRA CDs and IRA savings accounts, let’s first compare these two major types of IRAs.

What distinguishes the two types of IRAs (Traditional IRA vs. Roth IRA) is how their tax advantages work. You can contribute into a Traditional IRA and deduct that amount from your taxable income for that year to make the contribution of pre-tax dollars. When you withdraw from your Traditional IRA in retirement, you pay taxes on the capital gains, and if you took the tax deduction, you also pay taxes on the principal. With Roth IRAs, on the other hand, you contribute after-tax income. In this case, you don’t get a tax break from your contributions. You can withdraw all of your earnings and contribution tax-free in retirement. Any contributions that you took a tax deduction for are also subject to tax when you withdraw.

As with any financial product, it pays to know the rules. IRAs—both Roth and Traditional—may have a federal tax penalty of 10% for early withdrawals made before age 59½. For the 2024 tax year, the contribution limit for both types of IRAs is $7,000 per year. The limit is $8,000 if you’re over the age of 50. Traditional and Roth IRA plans can include both IRA CDs and IRA savings accounts.

Keep in mind that you cannot exceed certain income limits to contribute to a Roth IRA. However, there are no income limits for contributing to a Traditional IRA but there may be limitations on deductibility. Consult IRS guidelines to understand all criteria and limitations.

Now that we’ve covered the basics of Traditional and Roth IRAs, let’s consider the unique benefits of an IRA CD.

What is an IRA CD?

An IRA CD is a certificate of deposit that you hold inside your IRA. There is usually a required minimum to open up an IRA CD. This can range from hundreds to thousands of dollars. Just like a regular CD, an IRA CD will provide a fixed rate of return on your money until it matures at the end of its term. You can choose the term, which typically ranges from three months to 10 years, depending on your retirement time horizon.

Shawn Valco, CFP^®, former financial advisor, explains that the difference between regular CDs and IRA CDs is that with regular CDs, interest you earn is taxable in the year you receive it. Valco notes that with Traditional IRA CDs, tax on interest is deferred, allowing more money to stay in the IRA. “This increases the long-term growth of the CD compared to the annually taxed interest of a regular CD,” says Valco.

An added bonus, according to Bert Doerhoff, a Certified Public Accountant, is that some IRA CDs offer higher interest rates than regular CDs. Banks “don’t see that money in IRA CDs as mobile,” he says. “It stays with them, so they put an incentive on that with a higher interest rate.”

IRA CDs will often have low or no account fees, Doerhoff says. However, there can be penalties for withdrawing the money before the term ends.

What is an IRA savings account?

IRA savings accounts are another safe way to earn a return as you save for your retirement. Unlike IRA CDs, IRA savings accounts usually don’t require a minimum opening deposit. Also, there aren’t early withdrawal penalties from the bank where you hold the account. Finally, the annual percentage yield isn’t fixed like it is for an IRA CD.

IRA savings accounts may offer competitive rates. Additionally, you can contribute to one as often as you’d like, up to IRS limits. While there may be no bank early withdrawal penalties, there may be an IRS early withdrawal penalty. This depends on your plan type and how old you are when you withdraw your funds. Consider consulting a tax advisor to discuss your specific situation.

Thanks to their flexibility, IRA savings accounts can be a savvy addition to your retirement savings portfolio. Now that you know the basic features of IRA CDs and how IRA savings accounts work, let’s compare the two.

How IRA CDs and IRA savings accounts compare

These two products are similar in that they can both serve as dependable elements of a balanced retirement portfolio. “Both IRA CDs and IRA savings accounts are typically suited for retirement savers who have a lower risk tolerance,” Valco says.

The biggest differences between the two are their liquidity and interest rates.

IRA savings accounts can provide more liquidity

IRA savings accounts are highly liquid. This means you can reallocate money from your IRA savings account to other parts of your IRA without incurring any penalties or fees (as long as the money stays within your IRA). By contrast, IRA CDs are less liquid. If you withdraw money from an IRA CD before it matures, you’ll usually receive a penalty. This is the case even if the money stays within your IRA.

If you suddenly wanted to take advantage of another savings product within your IRA, it would be easier to move the funds from an IRA savings account than an IRA CD.

IRA CDs may offer better interest rates

One of the biggest differences between the two products is how they pay interest. “IRA savings account rates can go up or down depending on what the bank sets them at,” Valco explains. “This is usually driven by market interest rates.” On the other hand, he says, “IRA CDs pay a predetermined, guaranteed rate set at the time of investment. The rate is tied to the IRA CD term you choose; the longer the term, the higher the interest rate.”

So if you feel confident that you won’t need to access or reallocate your money for a set period of time, an IRA CD might make more sense than an IRA savings account. Depending on the term of your IRA CD, you might get a higher rate than an IRA savings account. You also wouldn’t worry about pulling out the money before the end of the term.

In short, IRA CDs offer a guaranteed rate at set terms. IRA savings accounts provide maximum flexibility at an interest rate that can change.

How to strategically use IRA CDs and IRA savings accounts together

IRA CDs and IRA savings accounts are different, but that doesn’t mean you have to choose one over the other. In fact, incorporating both of them into your retirement plan can generate some serious benefits.

Determine how much flexibility you need

Valco suggests that you start by determining your liquidity needs. In other words, how much flexibility do you want to have with the money in your IRA? If liquidity is a high priority, then a high-liquidity vehicle like an IRA savings account would be a wise choice. “But if you won’t need the money right away, you can take advantage of the higher rates of longer-term CDs,” says Valco. “IRA CDs may also be appropriate for savers who are concerned that interest rates will go down and they want to lock in a rate.”

Use both types of IRAs in tandem

Or, if you’re interested in building a strong retirement savings strategy, both IRA CDs and IRA savings accounts can be used in tandem, depending on your savings goals, financial needs and risk tolerance.

Because IRA CDs typically require a minimum deposit, Doerhoff points out that an IRA savings account can be used to save up for an IRA CD. With this strategy, you make contributions to your IRA savings account until you have enough to meet the IRA CD minimum opening deposit requirement. Then, you shift your funds to an IRA CD with a higher rate than what you’d earn in the savings account. Doerhoff adds that when CD rates are low, it can be a good idea to hold your funds in an IRA savings account while you wait for a stronger rate on IRA CDs.

When you’re ready, one effective way to leverage IRA CDs is to use a CD ladder. With this strategy, Valco explains that you would open a series of IRA CDs at different terms. For example, you might purchase one 12-month IRA CD, one two-year IRA CD and one three-year IRA CD. When the 12-month IRA CD matures, you can use that money—plus the interest it earned—to open a new IRA three-year CD. The next year, once the two-year IRA CD matures, you can roll those funds into another three-year IRA CD. Soon, you’re enjoying three-year CD rates with a new three-year IRA CD maturing each year. “This is straightforward to execute,” Valco says, “and creates a diversified exposure to short- and intermediate-term rates.”

Then again, you might not want to make an immediate decision after an IRA CD matures. If you’re not yet sure how you’d like to use matured IRA CD funds, Valco says an IRA savings account can be a safe, accessible place to house them until you do.

Regularly update your IRA CD and IRA savings account allocations

When saving over the long term for retirement, you may want to occasionally review the way your money is spread out across assets, such as savings products and investments.

“It’s also important to maintain flexibility while adhering to a financial plan,” says Valco. “What was once the best solution may not always be.” He suggests periodically monitoring your savings and investment allocations and being prepared to shift into IRA CDs if rates tick upward.

IRA CDs and IRA savings accounts, according to Valco, can be useful for many retirement savers. If you’re looking for liquidity and an option for any budget level, you’ll probably gravitate toward an IRA savings account. If a higher rate is what you’re after and you can meet the minimum deposit requirements, IRA CDs are likely what’s right for you. When used together, you can unlock the best of both retirement savings products as you take advantage of compound interest to strategically meet your retirement goals.

IRA CDs and IRA savings accounts can help you prepare for a secure retirement, but what should you do to keep your savings on track when the economy hits a rough patch? Prepare yourself with these steps to protect your retirement from a recession.

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*The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. Please consult your tax advisor with respect to information contained in this article and how it relates to you.