Can You Have a CD in an IRA Account?

Individual Retirement Accounts (IRAs) offer tax advantages for long-term savings. Certificates of Deposit (CDs), known for their stability and predictable returns, are permissible investment options within various IRA structures. This allows combining the security of a CD with the tax benefits of an IRA for retirement planning.

Holding Certificates of Deposit in an IRA

A CD is a savings certificate with a fixed maturity date and interest rate, typically offering a higher rate than a standard savings account. Withdrawing funds before maturity usually incurs a penalty, often a forfeiture of earned interest.

Common IRA types include Traditional, Roth, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, each offering distinct tax benefits. Holding CDs within an IRA allows interest to grow more efficiently by sheltering it from immediate taxation.

CDs are suitable for IRAs due to their fixed-income nature, principal protection, and predictable returns, which can contribute to a diversified retirement portfolio. Investors typically encounter two main types: bank-issued CDs, purchased directly from financial institutions, and brokered CDs, offered through brokerage firms. Brokered CDs are frequently easier to acquire and manage within existing IRA brokerage accounts, providing access to a wider selection of maturities and issuers.

Acquiring CDs Within Your IRA

Acquiring CDs within an IRA begins with selecting an IRA custodian or brokerage firm. Not all financial institutions offer the same range of CD products, particularly brokered CDs, so choose a provider that supports your desired investment options. Many major brokerage houses provide access to a broad marketplace of CDs from various issuing banks, facilitating diversification across different institutions and maturity dates.

Once a custodian is selected, fund the IRA account. This can be accomplished through direct contributions within annual IRS limits, rollovers from eligible employer-sponsored retirement plans like a 401(k), or transfers from existing IRA accounts. Funds must be deposited into the IRA before they can be used to purchase investment vehicles like CDs.

After the IRA is funded, the selection and purchase of CDs can commence through the chosen custodian’s platform. This involves comparing various CD offerings based on interest rates, maturity dates, and the financial strength of the issuing institutions. Investors should also verify that the CDs are covered by Federal Deposit Insurance Corporation (FDIC) insurance, which protects deposits up to specified limits.

Key Considerations for IRA CDs

Interest earned on CDs held within a Traditional IRA, SEP IRA, or SIMPLE IRA grows on a tax-deferred basis, meaning taxes are not paid on the earnings until funds are withdrawn in retirement. For Roth IRAs, the interest grows entirely tax-free, provided that distributions are qualified. This tax treatment allows the investment to compound more rapidly over the long term.

When a CD held in an IRA reaches its maturity date, the principal and accumulated interest are typically returned to the IRA cash account. At this point, the IRA owner has several options: the funds can be reinvested in a new CD, transferred to another type of investment within the IRA, or withdrawn from the IRA. Any withdrawal from a Traditional, SEP, or SIMPLE IRA would be subject to ordinary income tax, and if taken before age 59½, may also incur a 10% early withdrawal penalty, unless an exception applies.

It is important to distinguish between the early withdrawal penalties imposed by the CD issuer and the potential penalties for early withdrawals from the IRA itself. If a CD is broken before its maturity date, the issuing bank will typically assess a penalty, which often involves the forfeiture of a portion of the accrued interest, potentially reducing the principal amount returned. This penalty is separate from any tax implications or penalties related to withdrawing funds from the IRA account prior to retirement age.

FDIC insurance provides protection for CDs held in IRAs, covering up to $250,000 per depositor, per insured bank, for each ownership category. This means that if an individual holds CDs in their IRA at one FDIC-insured bank, the total amount of their deposits at that bank, including the CD, is insured up to $250,000. For individuals with larger IRA balances, it may be prudent to diversify CDs across multiple FDIC-insured institutions to ensure all funds remain within the insurance limits.

Required Minimum Distributions (RMDs) apply to Traditional, SEP, and SIMPLE IRAs once the account holder reaches age 73. The value of CDs held within these types of IRAs is included in the total account balance used to calculate the annual RMD amount. These distributions must be taken each year to avoid a penalty, and the funds withdrawn will be taxed as ordinary income.