Can You Invest in CDs in an IRA?

An Individual Retirement Arrangement (IRA) is a tax-advantaged savings account designed to help individuals save for retirement. A Certificate of Deposit (CD) is a savings account that holds a fixed amount of money for a set period, offering a fixed interest rate in return. It is possible to invest in Certificates of Deposit within an IRA, providing a secure and predictable component to a retirement portfolio. This approach offers a way to grow retirement savings with tax advantages, appealing to those seeking stability.

Eligibility of Certificates of Deposit in IRAs

The Internal Revenue Service (IRS) broadly permits a wide range of investments within an IRA, including stocks, bonds, mutual funds, certain real estate, and cash equivalents. Certificates of Deposit are considered a type of time deposit or savings vehicle, making them permitted investments.

CDs are offered by financial institutions and are not classified as prohibited investments. The regulatory framework for IRAs does not exclude these secure, interest-bearing accounts, allowing individuals to include CDs in their IRA investment strategy.

Types of IRAs for CD Investments

Several types of IRAs are compatible with holding Certificates of Deposit. A Traditional IRA allows tax-deductible contributions, with earnings growing tax-deferred until withdrawal in retirement. Roth IRAs are funded with after-tax contributions, meaning qualified withdrawals in retirement are tax-free. Both Traditional and Roth IRAs can accommodate CD investments.

Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs also permit CDs. SEP IRAs are for self-employed individuals and small business owners, while SIMPLE IRAs are designed for small employers. For 2025, the contribution limit for Traditional and Roth IRAs is $7,000, with an additional $1,000 catch-up contribution for those aged 50 and over. SEP and SIMPLE IRA contribution limits are significantly higher.

Steps to Invest in CDs within an IRA

Investing in Certificates of Deposit within an IRA starts with selecting a suitable financial institution. This could be a bank, credit union, or brokerage firm that offers both IRA accounts and CDs. Confirm the institution can facilitate CD purchases directly within the IRA structure.

Next, open the IRA account, which typically requires personal identification and beneficiary information. Once established, fund the IRA through direct contributions, rollovers from other retirement accounts like a 401(k), or transfers from existing IRAs. The institution will provide the necessary forms for these transactions.

After funding, purchase CDs by selecting terms like maturity dates and interest rates that align with your financial plan. The institution’s platform will guide the CD selection and provide confirmation statements.

Key Characteristics of IRA CDs

Certificates of Deposit held within an IRA benefit from specific protections and tax treatments. CDs purchased through federally insured banks are covered by Federal Deposit Insurance Corporation (FDIC) insurance, up to $250,000 per depositor per insured bank.

CDs have an early withdrawal penalty. If funds are withdrawn from a CD before its maturity date, the financial institution generally imposes a penalty, often a forfeiture of interest. This penalty applies whether the CD is held within an IRA or not. Additionally, withdrawing funds from the IRA itself before age 59½ can trigger a 10% IRS penalty on the taxable portion, plus income taxes.

Upon maturity, the CD principal and accrued interest become available. Investors can reinvest funds into a new CD, transfer them to another IRA investment, or take a distribution according to IRA rules. Prevailing interest rates influence yields on new CDs, impacting reinvestment decisions. Interest earned on CDs within a Traditional IRA grows tax-deferred, taxed only upon withdrawal in retirement. For Roth IRAs, interest grows tax-free, and qualified withdrawals are also tax-free.