Key insights:
- A Certificate of Deposit (CD) is a type of savings account that locks in a fixed interest rate for a set period, giving you a guaranteed return at the end of the term
- An individual retirement account (IRA) is a tax-advantaged retirement savings plan designed to help you save for retirement
- CDs and IRAs help you save money in different ways, and both may be good additions to your short- and long-term savings strategies
Certificates of Deposit (CDs) and individual retirement accounts (IRAs) can both help you save money and grow your wealth, but they serve very different purposes in a financial plan. While CDs are useful for short-term savings, IRAs are long-term investment vehicles that support retirement planning. Let’s explore how CDs and IRAs work, compare their features and help you understand when one might be more suitable than the other.
What is a CD?
A CD is a savings account that offers a fixed interest rate for a set term. You agree to leave your money untouched — typically from 3 months to 5 years or more — in exchange for a guaranteed return.
CDs are typically backed by federal deposit insurance, up to $250,000 per depositor, per insured bank, per ownership category, as long as you purchase from an FDIC-insured bank.
If you withdraw funds before the CD reaches its maturity date, you may have to pay an early withdrawal penalty. This usually means forfeiting a portion of the interest earned and sometimes more.
What is an IRA?
An IRA is a tax-advantaged retirement savings plan designed to help people set aside money for their future.
There are two main types of IRAs: traditional and Roth. A traditional IRA may offer tax deductions for contributions, while a Roth IRA allows for tax-free qualified withdrawals after you turn 59½.
IRAs can be set up through certain financial institutions, including banks, credit unions, mutual fund companies, insurance companies and brokerage firms.
Within an IRA, you can invest in a range of assets — such as CDs, stocks, bonds or mutual funds — depending on what your provider offers.
Key differences between CDs and IRAs
Let’s look at some of the main differences between CDs and IRAs.
- Timeline: A CD is typically used for short-term savings goals where safety and predictability matter. An IRA is meant for long-term retirement savings, where growth potential and tax advantages can play a bigger role.
- Tax benefits: CDs do not offer tax benefits. Any interest earned is generally taxed as ordinary income in the year it’s received. In contrast, an IRA can provide tax-deferred growth with a traditional account or tax-free qualified withdrawals with a Roth account.
- Access to funds: CDs have fixed terms, and taking money out early may result in a penalty. IRAs have age-based withdrawal rules, and taking funds out before you turn 59½ may lead to income taxes and additional penalties unless you qualify for an exception, such as qualified educational expenses or medical expenses.
- Earnings: Earnings are predictable with CDs since the interest rate is fixed for the term. With an IRA, growth depends on the investments you choose, so returns can vary over time.
Knowing how IRAs and CDs work can help you choose the best fit — or the right combination of accounts — for your needs.
Holding a CD inside an IRA
An IRA can hold different types of investments, including CDs. When a CD is purchased within an IRA, it is often called an IRA CD.
An IRA CD works like a regular CD, offering a fixed interest rate for a set term and federal deposit insurance up to applicable limits. The difference is that the interest earned grows within the IRA’s tax-advantaged structure. In a traditional IRA, the earnings on the CD are tax-deferred until withdrawal. In a Roth IRA, qualified withdrawals of those earnings are tax-free.
IRA CDs can be a good fit for savers who want the predictability of a CD while still building retirement savings.
CD or IRA: Which is better for you?
CDs and IRAs both offer ways to save money and grow your wealth, but they serve very different purposes.
- Short-term goals: If your priority is predictable returns and meeting a short-term goal, a CD may be the better choice. It may be FDIC insured and offer a fixed interest rate and a set maturity date, which can make it easy to plan exactly when you will have access to your money.
- Long-term goals: An IRA is generally better suited for long-term retirement savings. With potential tax advantages and a range of investment options, it can help your money grow over decades.
You don’t have to choose one or the other. In fact, many people use both. Some savers use CDs for shorter-term savings goals while also contributing to an IRA for retirement growth. The right mix depends on your timeframe
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
