IRAs vs. Certificates of Deposit: What’s the Difference?

IRAs vs. Certificates of Deposit: An Overview

An individual retirement account (IRA) can be considered an individual savings and investment account that has tax benefits. An important distinction to make between a certificate of deposit (CD) and an IRA is that the latter is not an investment. Rather, it is an account in which you keep investments, such as stocks, bonds, and mutual funds.

A CD, on the other hand, is a savings instrument that pays a specified interest rate over a defined period and repays the principal when that period ends. You can choose a CD as one of the investments in an IRA.

Key Takeaways

  • An IRA is a tax-advantaged retirement account that holds investments while a CD is a savings instrument.
  • You can only open an IRA by yourself, but you can purchase a CD jointly with someone else, such as a spouse or child.
  • CDs must be held until the maturity date; otherwise, you will have to pay a penalty.

Individual Retirement Accounts (IRAs)

Each person has their own IRA, and spouses always have their own accounts, never a joint account. IRA account holders can choose the investments in their account and change them if desired. The returns from the account depend on the performance of the investments held in the IRA account. An IRA continues to accumulate contributions and earnings until the account holder reaches retirement age, meaning that the person could have an IRA for decades before making any withdrawals.

The Internal Revenue Service (IRS) defines and regulates IRAs. The IRS sets eligibility requirements, limits on how and when you can make contributions, and the amount of required minimum distributions (RMDs) that you must start taking from your traditional IRA accounts when you reach age 70½. The IRS also, of course, determines the tax treatment for the various types of IRA accounts.

As of 2021, the maximum you can contribute each year to your traditional or Roth IRA has not changed since 2019 and is $6,000 ($7,000 if you are age 50 or older) or your taxable income for the year, whichever is lower. Traditional IRA regulations allow you to take early withdrawals (before age 59½) under certain circumstances. Roth IRA regulations are more flexible, allowing you to withdraw contributions at any time as long as you do not withdraw any of the earnings (otherwise penalties apply).

Certificates of Deposit

CDs, on the other hand, are savings instruments issued and administered by banks, credit unions, and brokers. Unlike an IRA, a CD can be jointly owned. For example, you and your spouse or you and your child could own one together.

CDs are usually insured by the FDIC for up to $250,000, but IRAs are not.

CDs are considered one of the safest investments available. They are more conservative than stocks and bonds but offer lower returns. They are also insured by the Federal Deposit Insurance Corporation (FDIC) if they are issued by an FDIC-insured bank.

CDs pay a specified rate of interest over a defined period and repay your principal at maturity. Therefore, CD owners know how much they will earn over the life of a CD. CDs can be issued in any denomination, and their maturities typically range from one month to five years or longer. However, if you make a withdrawal from a CD before its maturity date, you will owe a penalty.

Advisor Insight

Rebecca Dawson

President – Dawson Capital, San Mateo, CA

IRAs are available to anyone of any age as long as you have earned income. You can invest the funds in your IRA in, but not limited to, stocks, bonds, mutual funds, and CDs.

An IRA is an account that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis, depending on the type of IRA.

A CD is a type of fixed-interest-rate deposit over a set period of time. When that term ends, you can withdraw your money or roll it into another CD.

CDs offer a low return but are among the safest investments a person can make. The interest rate is determined ahead of time. CD owners are guaranteed to get back what they invested, plus interest, once the CD matures. What’s more, if the bank goes under, their deposit is likely insured by the FDIC for up to $250,000.

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