Difference Between a CD, IRA & Roth IRA

by Brian Nelson, Demand Media
    Understanding the types of accounts and financial products you are saving and investing in is the most important step.

    Understanding the types of accounts and financial products you are saving and investing in is the most important step.

    Personal finance can be tricky. There are many different account types and even more financial products to keep straight. Fortunately, once you grasp the basics of certain financial accounts and savings and investment vehicles, the picture starts to clear up. Sorting out how Roth IRAs, IRAs, and CDs work and how they can work together is a good start.

    Accounts vs. Products

    It isn't always easy to tell the difference between a financial product and a financial account. In part, this is due to how they are marketed by different financial institutions. For example, many banks market an IRA CD, which can sound like something different than a "regular" IRA. Remember that a Roth IRA and a traditional IRA are both types of IRS regulated accounts. A CD is financial product and one of many financial products that can be held within an IRA or Roth IRA.

    Certificates of Deposit

    A CD, or Certificate of Deposit, is a financial product. Banks or other financial institutions offer customers a higher interest rate in exchange for the customer committing to keeping the funds in the account for a set period of time. Traditionally, the longer the time commitment, the higher the interest rate. CDs are usually held under separate account numbers at a bank. However, multiple CDs can be held within a single account at a brokerage firm.

    IRAs

    The two main types of IRA accounts are traditional IRAs and Roth IRAs. Each is a tax-advantaged account regulated by the IRS. An array of savings and investment vehicles can be held within an IRA, including CDs, mutual funds, stocks, bonds and even real estate. A person may have more than one IRA account.

    Traditional IRA vs. Roth IRA

    Both traditional and Roth IRA accounts offer tax-deferred growth on all money invested inside of the account. However, when funds are withdrawn from a traditional IRA, the taxpayer is liable for ordinary income taxes on all monies withdrawn. In addition, beginning at age 70 1/2, an IRA account holder must begin taking required minimum distributions, or RMDs, from the account. Some taxpayers qualify for a tax deduction for contributions made to a traditional IRA.

    In contrast, all funds withdrawn from a Roth IRA are tax-free. In addition, no RMDs are required for owners of a Roth IRA account. However, no tax deduction is available for any contributions to a Roth IRA.

    IRAs vs. CDs

    As discussed, an IRA is a type of account defined and regulated by the IRS. A CD is a type of savings vehicle created and administered by the bank that issues it. An IRA CD is nothing more than a CD within an IRA account.

    About the Author

    Brian Nelson is a professional freelance writer and owner of ArcticLlama Freelance Writing. Brian is a former certified financial planner, has experience in computers and technology, and is a MCSE. He has a degree in biochemistry from the University of Colorado. Nelson has written for numerous publications and websites, including eHow, Corporate Eye, Finance Gourmet, and Train Signal Training.

    Photo Credits

    • life savings image by Kimberly Reinick from Fotolia.com