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If you’ve already maxed out your retirement contributions through your employer’s plan or you’re not eligible to participate in a plan at work, an individual retirement account (IRA) could be incredibly valuable. IRAs are typically categorized as traditional or Roth accounts, but there’s also a third option in the form of an IRA CD. This particular savings vehicle combines certain features of an IRA with a banking certificate of deposit, or CD. There are advantages and disadvantages associated with each option, so it’s important to understand how they work when making your choices. Feel free to speak with a financial advisor about the specifics of your situation and how they should affect your decision.

What Is an IRA CD?

When you invest in a certificate of deposit (CD), the money earns interest over a set period of time. Depending on the CD, this time frame may be a few months or a few years. Once the CD matures, you can take the money out or roll it over for a new term, at likely a new rate. If you cash out of a CD early, you’ll typically have to pay a penalty, which makes this move very undesirable.

An IRA CD works in a similar way, with your money growing on a tax-deferred basis as it would in many retirement accounts. So your initial investment will earn returns via a fixed interest rate over a set time, at the end of which it will renew automatically. Typically speaking, the longer you put your money away for, the higher the rate you’ll receive. An IRA CD’s main difference from a regular CD, though, is that the former offers certain tax advantages that are associated with a traditional or Roth IRA, while a basic CD does not.

With an IRA CD, you’re subject to the same limitations on contributions and withdrawals as you would be with a traditional or Roth IRA. If you decide to take the money out early the same taxes and penalties would apply. You should also keep in mind that investing in an IRA CD counts towards your total annual IRA contribution limit, which is $6,000 for 2022.

In terms of security, an IRA CD offers a safer investment since your interest rate is not subject to fluctuations in the market. CDs are insured by the FDIC for up to $250,000 so if your bank goes under you’ll be protected up to the federal coverage limits.

What Is a Traditional IRA?


A traditional IRA allows you to save for retirement on a tax-deferred basis, as well as deduct some or all of the money you deposit in it. The IRS caps the amount you can put into a traditional IRA each year. For 2022, the contribution limit is $6,000, plus an additional $1,000 in “catch-up contributions” for savers over age 50.

You can open and contribute to a traditional IRA at any age, as previously enforced IRA age restrictions were dropped by the IRS in 2020. There are no income restrictions on who can contribute, but your income does factor into what amount of your contributions, if any, you can deduct. Whether or not you’re covered through an employer’s retirement plan also has an impact.

For 2022, single filers covered by an employer’s plan can deduct the full amount of their contribution if their adjusted gross income (AGI) is $68,000 or less. The AGI limit for full deductions for married couples filing jointly is $109,000 or less. If you’re married and file separately, though, the AGI limit is just $10,000. If you surpass any of these marks, you may be able to deduct a portion of your contributions. However, deductions are fully phased out if your AGI is higher than $78,000, $129,000 or $10,000, respectively.

If you’re single and not covered by an employer’s plan, then no AGI limit applies to what you can deduct. However, for 2022, married couples filing jointly are subject to an AGI cap of $204,000 or less when one spouse is covered through their workplace. Then deductions are fully phased out for married couples filing jointly if their AGI is higher than $214,000. The same rules above apply to married couples who file separately.

Generally, you won’t owe taxes on the money in a traditional IRA until you start making withdrawals. Penalty-free withdrawals are only allowed after you reach age 59.5. If you take cash out before then, you’ll have to pay taxes on the money along with a 10% early withdrawal penalty. Once you turn 72, you’re required to begin taking minimum distributions or face a much stiffer tax penalty.

What Is a Roth IRA?

The Roth IRA is a viable alternative to a traditional IRA, as it comes with some distinctly different tax benefits. A Roth IRA is funded with after-tax dollars, which means you won’t get a deduction for your contributions. However, you then won’t have to pay any taxes on qualified withdrawals you make when you’re retired.

The annual contribution limits for a Roth account are the same as a traditional IRA – $6,000 per year, or $7,000 if you’re 50 or older. Unlike a traditional IRA, though, Roth savers must meet certain income guidelines in order to contribute to this type of account.

For 2022, single filers with an AGI of $129,000 or less are eligible to chip in the full amount. Married couples earning $204,000 or less annually are also able to put money up to the full limit into a Roth IRA. For married couples filing separately, the AGI limit is $10,000 if you lived with your spouse at any point during the year. If you did not live with your spouse during the year, and you’re filing separately, your rules are the same as they are for single filers.

You can take money out of a Roth IRA tax- and penalty-free if your account has been open for at least five years and you’re age 59.5 or older. If you withdraw money before age 59.5, the earnings are subject to tax and you’ll also get hit with the early withdrawal penalty. There are exceptions to this rule if you’re using the money to purchase a first home, to pay for qualifying medical expenses that exceed 10% of your gross income or you become totally and permanently disabled. There are no minimum distribution requirements with a Roth IRA.

Comparing IRA CDs to Traditional and Roth IRAs


As you can see above, there are many ways to save for retirement, while also gaining various types of tax benefits. Moreover, these options don’t even include the likes of employer savings accounts, like 401(k)s, 403(b)s and more. Here are some factors to consider when choosing between an IRA CD, Roth IRA and traditional IRA.

Let’s say the retirement savings you’re either currently accumulating or expect to have will lead to an income higher than what you’re earning while you’re saving. If that’s the case, then a Roth IRA could be an exceptional retirement savings vehicle for you. That’s because a Roth IRA has no current tax benefits, but qualified withdrawals in retirement will be entirely tax-free.

Now look at things the opposite way – let’s say you expect your income to be lower in retirement than what it is while you save. In this scenario, a traditional IRA will let you avoid income taxes until you withdraw in retirement, while reducing your tax liability now with deductible contributions. However, make sure you’ll fall into the correct income brackets to be eligible for these deductions, otherwise a major benefit might fall to the wayside

The IRA CD doesn’t really fit neatly into a versus argument with the traditional and Roth IRAs. That’s because while it receives similar tax benefits, its method of earning returns is much different.

For instance, a traditional or Roth account lets you invest the assets you deposit into stocks, bonds, ETFs and other investments. An IRA CD, on the other hand, earns fixed returns through an interest rate that’s given to you by a financial institution. In short, if you’re risk-averse and are simply looking to earn a little extra money for your retirement savings, an IRA CD could be a viable alternative. But if you’re looking to maximize your returns for retirement, an IRA CD’s potential might be too low for you.

Bottom Line

Choosing the right retirement savings vehicle requires a careful evaluation of your income, current tax situation and your long-term outlook. If you want tax breaks now and you expect your tax bracket to be lower in the future, then a traditional IRA may make sense. If you’re only interested in supplementing an employer’s plan without any immediate tax benefit, you may be better off with a Roth. The IRA CD offers a safer investment for those with a low risk tolerance. Ultimately, the option you choose should reflect your comfort level and overall savings goals.

Retirement Planning Tips

  • There are many suitable ways to save for retirement, and your retirement plan can include a handful of different methods. If you’re unsure of where to start, consider speaking with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Using an IRA to save for retirement works perfectly fine for many people. However, they don’t have to be the only retirement savings vehicle you take advantage of. Use SmartAsset’s 401(k) calculator to see what a 401(k) could do for you as well.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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