IRAs vs. CDs

CDs and IRAs both offer a place to stash extra cash, but they operate under much different regulations.

CDs and IRAs both offer a place to stash extra cash, but they operate under much different regulations.

Saving money by doing more than putting funds in a savings account requires understanding a new set of financial products and accounts. Certificates of deposit, or CDs, have many features in common with traditional savings accounts but come with more restrictions. IRA accounts offer impressive tax advantages, but there are restrictions on withdrawing funds before retirement. A comparison of CDs and IRAs can help you make the right decisions for your financial needs.

IRA Basics

Individual retirement arrangements, or IRAs, are a popular, tax-advantaged way to save for retirement. Funds inside an IRA grow tax-deferred, and contributions to a traditional IRA may be deductible. Over the years, this can add up to a lot of money. IRA accounts are regulated by the IRS, which imposes a 10 percent tax penalty on withdrawals made before the account owner is age 59 1/2. For that reason, an IRA is only for long-term retirement investing purposes.

CD Basics

A CD, or certificate of deposit, is a financial product offered by banks. A CD offers a higher interest rate to the customer in exchange for a commitment to keep the money in the CD for a specific period of time. CDs are typically offered for periods of three months, six months, 12 months, 24 months, 36 months or five years. Generally, the longer the duration of a CD, the higher the interest rate it pays.

Allowable IRA Investments

Numerous investments and financial products can be held within an IRA account. Stocks, bonds, mutual funds and even real estate are all allowed inside an IRA. In addition, money inside an IRA can also be deposited in a money market fund or other interest-bearing account, such as a CD.

IRAs and CDs Together

An IRA is a type of account, and a CD is one of many investments that can be held inside that account type. An individual may have any number of IRA accounts so long as each meets IRS requirements. Banks offer CDs within IRAs to their customers. Most banks establish a separate account number for each IRA CD. But in a brokerage account, for example, a customer can hold multiple CDs within the same account. In this case, a single IRA account could hold several CDs.

Video of the Day

Brought to you by Sapling
Brought to you by Sapling

Photo Credits

  • Jupiterimages/BananaStock/Getty Images