Purpose: A CD is a short-term investment with guaranteed returns. An IRA, on the other hand, is designed for long-term retirement savings, allowing for various investments that can grow over time. IRAs are meant to help build wealth for retirement, whereas CDs provide a safe place to store money for a few months or years.
Risk and returns: CDs are low-risk because the returns are fixed and guaranteed. IRAs, while potentially offering higher returns, invest in stocks, bonds and other market-based assets. The value of your IRA can fluctuate based on market performance.
Tax treatment: CDs are taxed like any other savings account, meaning the interest earned is subject to ordinary income tax in the year it’s received. IRAs, however, offer tax advantages. In a traditional IRA, contributions may be tax-deductible and taxes are deferred until you make withdrawals. Roth IRAs offer tax-free withdrawals in retirement, making them attractive for those who expect to be in a higher tax bracket.
Liquidity: CDs are less liquid than other accounts because withdrawing money before the term ends results in a penalty. IRAs have restrictions as well, with penalties for withdrawing before age 59.5, but some exceptions for IRA hardship withdrawals, like buying a first home or covering medical expenses, may allow early access without penalties.
Contribution limits: CDs don’t have contribution limits; you can deposit as much as you want. IRAs, on the other hand, have annual contribution limits set by the IRS, which in 2024 are $7,000 for individuals under 50 and $8,000 for those 50 and older.