How to Buy a CD in an IRA Account

IRAs can buy CDs, but the returns are low.

IRAs can buy CDs, but the returns are low.

When you pull money out of your IRA, it'll gets taxed as regular income. Since interest from CDs is already taxed at regular income rates, you don't lose anything by having a CD in your IRA. You do, however, if you buy stock that would otherwise get a lower capital-gains rate.

Buying a CD

All that you need to do to buy a CD is to put money into your IRA through your annual contribution or through a rollover or use the money already in your IRA, such as from interest or dividend payments. Direct your custodian to put it into a CD account.

Terms and Rates

When you open a CD, you promise to let the bank hold onto your money for a set period of time. In exchange for your promise, the bank agrees to pay you a higher rate of interest. Generally, the longer you let your money sit, the more interest you will receive. Since IRAs are long-term savings vehicles, it's smart to take out the CD with the longest term which you're willing to commit to, especially when you're young. Bear in mind, though, that once your money is in a CD, it's stuck there until the CD matures unless you're willing to pay early withdrawal penalties.

Bank vs. Broker

Many CDs are underwritten by banks and carry Federal Deposit Insurance Company insurance up to $250,000 of deposits per depositor per bank. CDs from brokers are also usually insured by the FDIC, since they're placed at banks. This isn't always the case, though, and if your broker misregisters the account, you could lose your coverage. This risk may outweigh the additional return that some brokered CDs offer.

Alternatives

While a CD can be a good choice if you need secure income, the returns on many CDs are relatively low. A long-term government bond may offer a higher rate of return. Alternatively, bond funds, real estate investment trusts and dividend-paying stocks carry more risk but offer higher returns. Like CDs, they also pay regular dividends, putting cash into your account.

 

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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