IRA vs. CD: What's the difference?

Key takeaways

• Both IRAs and CDs can be a part of your diversified investment strategy.
• IRAs are great for long-term retirement savings and may have tax advantages.
• CDs are ideal for short-term savings, with stable returns.

Looking for an investment tool that will help you grow your money, either in the short-term or long-term? Consider a certificate of deposit (CD) and/or an individual retirement account (IRA). Both can be a part of your diversified investment strategy, however, they're quite different in how they work and when you might want to use one over the other.

CD vs. IRA overview

While IRAs and CDs are both tools for saving, but there are key differences between the two.

An IRA is a retirement investing account that offers tax advantages. You can hold a range of investments in an IRA, including a CD.

A CD is an account to which you deposit funds for a set period of time in exchange for a guaranteed rate of return. You can use CDs as part of your retirement strategy.

Here are the main differences between CDs and IRAs:

	Type of account	Investment period	Tax benefits?	Guaranteed return?
CD	Deposit	1 month - 10 years	No	Yes
IRA	Investment	Until age 59 1/2 or later	Yes	No

IRAs are best for those building a nest egg for retirement. CDs are better for short-term investments and can provide guaranteed returns you can use for things like buying a home or paying for a wedding in the coming months or years.

See more: Best IRA CDs

What to know about IRAs

An IRA is an investment account with tax advantages that incentivize people to save for retirement. An IRA holds investments within it, so you don't technically invest in an IRA. For example, an IRA can include stocks, bonds, exchange-traded funds (ETFs), CDs and more.

Types of IRAs

There are many types of IRAs, but the two most popular are:

• Roth IRA
• Traditional IRA

The differences between the two have to do with taxes. With a Roth IRA, you invest money you've already paid taxes on and can withdraw the contributions, including any earnings, tax-free in retirement.

With a traditional IRA, you invest pre-tax money but will pay taxes when you withdraw the money in retirement. Traditional IRA withdrawals are taxed as ordinary income.

IRA contribution and income limits

Both traditional and Roth IRAs have contribution limits. The limit for IRAs in 2025, for example, is $7,000 per year. Those aged 50 and older are allowed to contribute an extra $1,000 in catch-up contributions, for a total limit of $8,000.

There are no income ceilings on traditional IRAs, so anyone can open one and contribute to it. There are income caps on Roth IRAs, however. This means that if you (or you and your spouse, if you're married filing jointly) make over a certain amount in a year, you cannot contribute to a Roth IRA. Consult the IRS Roth IRA income table to see if you're eligible to contribute to a Roth IRA and how much.

How to open an IRA

Opening an IRA isn't complicated, but you'll want to do your homework to make sure you choose the best option because there are key differences between types, including how the money you invest is taxed.

Before you open an IRA:

1. Explore IRA providers. Banks, credit unions, brokerage firms and robo-advisors all offer different IRA accounts.
2. Choose an IRA type: Choose which kind of IRA - Roth or traditional - that you want to open (and if it's a Roth, check to see if your income makes you eligible). Choose a traditional IRA if you want to invest pre-tax money and pay the tax when you're retired. Choose a Roth IRA if you want to invest post-tax money and make withdrawals in retirement tax free.
3. Fill out your application. You'll be asked for information like your Social Security number, employment information and details on your beneficiaries.
4. Fund your account. You can make a lump contribution, roll over a 401(k) and/or set up monthly contributions.
5. Determine your investment mix. Depending on when you plan to retire, you can opt for a more aggressive investment plan or one that's more risk-averse.
6. Keep an eye on your account. Monitor performance and adjust your investments if necessary.

Before you open an IRA, have a plan for how much you want to invest per year, and when you'll withdraw the money. There may be a required minimum distribution if you wait until age 73 to withdraw money.

Also, be aware that you can't open an IRA with a spouse or child.

Rules on withdrawing money

With a traditional IRA, withdrawals taken before age 59 1/2 incur a penalty. There are some exceptions, however, such as if you use the money to pay for medical insurance if you lose your job. Starting at age 73, withdrawals from a traditional IRA are mandatory.

Roth IRA withdrawals also are subject to a tax penalty if taken before age 59 1/2 , with some exceptions, such as personal or family emergency expenses. Also, there is a five-year wait period after your first account contribution before withdrawals are allowed. However, there are no required minimum distributions with a Roth IRA.

Pros and cons of IRAs

Pros A good option for a retirement account, especially if you don't have access to a 401(k) through your employer. Tax advantages. Flexibility to invest in an array of assets, such as stocks and bonds.

Cons Stocks in an IRA - for instance - are not insured by the Federal Deposit Insurance Corporation (FDIC). For individuals only; you cannot open a joint account with another person. Penalties for withdrawing funds early.

What to know about CDs

CDs are savings accounts that require the account holder to keep the money in the account for a set amount of time, called the term. CDs pay a fixed interest rate for the term. In exchange for this guaranteed rate of return, you agree to keep your money in a CD for the set length of time. If you withdraw your money early, you'll likely have to pay an early withdrawal fee.

At the end of the term, known as the maturity date, you have the option to withdraw the money from the CD. If you don't withdraw the money, the CD may auto-renew, and maybe at a rate you don't like, so be aware of the maturity date.

Learn more: What to do if you missed your CD's maturity date

CDs typically offer higher yields than savings accounts but lower returns than riskier investments such as stocks. CDs are better for shorter-term savings goals (think a few months to five years) and those living on a fixed income. Meanwhile, riskier investments such as equities are better for longer-term savings goals that allow you to ride out any dips in value and benefit from higher long-term growth rates. You can hold these types of investments within an IRA.

Types of CDs

There are several types of CDs, including:

• Standard CD
• No-penalty CD
• Bump-up CD
• IRA CD

With a standard CD, you deposit a fixed amount of money for a set term (such as six months, one year or three years) and receive a fixed interest rate.

A no-penalty CD doesn't charge fees if you withdraw your investment early. A bump-up CD lets you increase your rate of return while the CD matures. And an IRA CD provides a guaranteed return on retirement investments.

Compare: Bankrate's picks for the best CD rates

CD deposit information

There are no income limits keeping you from depositing as much money as you want into a CD. And while some banks may impose a cap on how much you can hold in one CD, it's likely in the many hundreds of thousands, if there is a limit at all.

Some institutions offer jumbo CDs that require a minimum of $100,000 deposit to earn a certain APY. Most banks however, have minimum deposit requirements of $0 to $10,000.

If you're considering depositing a sizable amount, pay attention to deposit insurance. CDs that are held at banks insured by the Federal Deposit Insurance Corp. (FDIC) or at credit unions that are part of the National Credit Union Administration (NCUA) are insured for up to $250,000, per depositor, per insured financial institution, for each account ownership category. Any money in the CD above that threshold, whether it's the deposited money or the interest earned on the account, won't be insured if the bank were to fail.

If you're in a position to save more than $250,000 in a CD, it's advisable to spread the funds in CDs at separately chartered financial institutions.

Note that while there's no income limit for opening a standard CD, that's not true for IRA CDs. If you invest in a CD that's within a Roth IRA, you will be subject to the Roth IRA income limits.

How to open a CD

Opening a CD is usually fairly easy:

1. Shop around at financial institutions that offer CDs. You'll often find good APYs at top online banks, the best credit unions and brokerages.
2. Explore CD options. Choose the term, type (standard, no-penalty, etc.) and APY that works best for you.
3. Open your account. You'll need to provide personal information like your Social Security number and financial details. If you open a joint CD, both parties will need to provide their information.
4. Next, fund the CD. You can make a bank transfer, mail a check or make an in-person cash deposit.

When the CD reaches maturity, you can withdraw your investment plus the interest earned, or you can roll over the CD for another term.

Rules on withdrawing money

You'll more than likely pay a penalty fee if you withdraw the money before the end of the CD term. Penalties for early withdrawal can be stiff and can erode your earnings and maybe even your principal. Some financial institutions offer no-penalty CDs that let you access the money before the maturity date without any penalties, although rates tend to be lower than traditional CDs.

Pros and cons of CDs

Pros Can be opened as a joint account with a spouse or child. FDIC and NCUA insured, up to a limit. Low-risk accounts with guaranteed returns.

Cons May charge an early withdrawal penalty. Lower returns than with riskier investments, such as equities, over the long term.

Determine how IRAs and CDs fit into your financial plan

IRAs and CDs are very different financial products. You don't necessarily have to pick one or the other; both accounts may be beneficial for you.

A CD is ideal for people who:

• Want a guaranteed return on their investment
• Want to grow their money over a few months or years
• Can leave their money alone for the term of the CD
• Want to earn money for a specific event in the short-term, like a vacation or a home renovation

An IRA is a good fit for people who:

• Are saving for retirement
• Like having flexibility in what they invest in
• Are okay with some market risk
• Can commit to a long-term investment

Both are a good fit for people who:

• Are conservative in their retirement savings
• Have both short- and long-term savings goals
• Want to prepare for market volatility

Here's what having both an IRA and CDs might look like: You could contribute to a Roth IRA that holds a variety of investments including ETFs, stocks and bonds with the purpose of building long-term wealth to fund your retirement. At the same time, you could open a three-year regular CD to earn interest on money earmarked for a down payment on a home.

Bottom line

Deciding whether to open an IRA or CD, or both, depends on your financial goals. Leverage the tax advantages of IRAs to save for retirement. Consider a CD when you have a short-term savings goal and want to protect your principal.

FAQ

• Which do you pay fewer taxes for: CD or IRA? This will depend on your personal situation. For example, qualified Roth IRA withdrawals are tax-free, but that's because you paid taxes on the money you contributed to the account. Within a traditional IRA, gains within the account are not taxed as long as the money remains in the IRA. With a CD, you are taxed on the interest you earn every year.
• Can you make more money in a CD or IRA? How much you earn for either a CD or an IRA depends on how much you invest, but generally, CDs offer fixed returns, while IRAs depend on your investment vehicles. IRAs have the potential to generate higher returns, though it's not guaranteed.
• Can IRA money go into a CD?

  Yes, you can invest part of your IRA funds in one or more CDs. There are even specific IRA CDs that provide guaranteed returns in a retirement account.