Can a Certificate of Deposit Be Held Within an IRA?

A Certificate of Deposit (CD) can be held within an Individual Retirement Account (IRA), combining the predictable returns of a CD with the tax advantages of an IRA. An IRA is a tax-advantaged savings vehicle for retirement, and a CD is a type of savings account.

Understanding Individual Retirement Accounts

Individual Retirement Accounts are savings vehicles that help individuals accumulate funds for retirement with tax benefits. They encourage long-term savings by offering incentives that can reduce current tax liability or provide tax-free income in retirement. The two most common types of IRAs are Traditional IRAs and Roth IRAs, each with distinct tax treatments.

Traditional IRAs allow for tax-deductible contributions, which may reduce taxable income in the year of contribution. Investments within a Traditional IRA grow tax-deferred, with taxes on earnings postponed until withdrawals in retirement. Roth IRAs are funded with after-tax dollars, so contributions are not tax-deductible. Qualified withdrawals from a Roth IRA in retirement, including contributions and earnings, are entirely tax-free.

Understanding Certificates of Deposit

A Certificate of Deposit is a savings product offered by banks and credit unions where a fixed amount of money is deposited for a predetermined period. This period is known as the term. In exchange for committing funds for the full term, the financial institution pays a fixed interest rate.

CDs have a fixed maturity date, at which point the principal and accrued interest become available for withdrawal. If funds are withdrawn before this maturity date, an early withdrawal penalty is usually imposed, which can result in the forfeiture of a portion of the earned interest or, in some cases, a portion of the principal. Deposits held in CDs are generally insured by federal agencies, such as the Federal Deposit Insurance Corporation (FDIC) for banks or the National Credit Union Administration (NCUA) for credit unions, up to a specified limit per depositor.

Holding CDs Within an IRA

Combining a Certificate of Deposit with an Individual Retirement Account involves opening a specific type of IRA that is structured to hold CDs. This is not a matter of simply placing an existing CD into a pre-existing IRA brokerage account. Instead, individuals typically establish a new IRA directly with a bank or credit union that offers these specialized accounts, often referred to as an “IRA CD” or “CD IRA.”

The process begins by deciding whether a Traditional IRA CD or a Roth IRA CD aligns best with an individual’s financial and tax planning goals, considering their current tax bracket and anticipated future tax situation. Contributions to fund the CD within the IRA must adhere to the annual IRA contribution limits set by the Internal Revenue Service. For 2025, the annual contribution limit for IRAs is $7,000, with an additional $1,000 catch-up contribution permitted for individuals age 50 and older, bringing their total to $8,000. The CD then acts as the investment vehicle held within the tax-advantaged wrapper of the IRA.

Key Aspects of IRA CDs

The interest earned on a CD held within a Traditional IRA grows tax-deferred, meaning taxes are not due on the interest until the funds are withdrawn in retirement. For a Roth IRA CD, the interest grows tax-free, and qualified withdrawals, including the interest, are also tax-free in retirement, provided certain conditions are met, such as being age 59½ and having held the account for at least five years. This tax treatment of interest contrasts with taxable CDs, where interest is taxed annually.

Early withdrawals from an IRA CD can incur two layers of penalties. First, the CD itself will impose its own early withdrawal penalty, which results in the forfeiture of a portion of the interest earned. Second, if the withdrawal from the IRA occurs before the account holder reaches age 59½, the Internal Revenue Service may impose an additional 10% penalty tax on the withdrawn amount. Traditional IRA CDs are also subject to Required Minimum Distributions (RMDs) once the account holder reaches a certain age. For those born in 1959 or earlier, the RMD age is 73, while for those born in 1960 or later, it is 75. However, Roth IRAs, including Roth IRA CDs, are not subject to RMDs for the original account owner during their lifetime.

Funds held within an IRA CD are insured by the FDIC or NCUA, generally up to $250,000 per depositor, per insured institution. This coverage applies to all retirement accounts held by the same depositor at a single institution, meaning that if an individual has multiple IRA CDs or other retirement accounts at the same bank or credit union, their combined balance within those retirement accounts is insured up to $250,000. This insurance limit is separate from coverage for other individual accounts an individual may hold at the same institution.