What is an IRA?
An individual retirement account, or 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 down the road.
IRAs can be set up through 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 in a Traditional account or tax-free qualified withdrawals in a Roth account.
- Access to funds: CDs have fixed terms, and taking money out early usually results in a penalty. IRAs have age-based withdrawal rules, and taking funds out before age 59 1/2 may lead to income taxes and additional penalties unless you qualify for an exception.
- 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.
CD or IRA: Which is better for you?
If your priority is predictable returns and meeting a short-term goal, a CD may be the better choice. It offers a fixed interest rate, may be FDIC insured and a set maturity date, which makes it easy to plan exactly when you will have access to your money.
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.
These options are not mutually exclusive. 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, financial goals and comfort with risk.
Holding a CD inside an IRA
An IRA can hold different types of investments, including certificates of deposit. 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 stability of a CD while still building retirement savings.
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.
