As some of you may be nearing retirement, you’re probably thinking about the best way to maximize your retirement funds in the home stretch. IRAs (individual retirement accounts) are a great strategy for your retirement savings and with the current state of interest rates (5% and above) placing your IRA funds in a CD (Certificate of Deposit) allows you to earn more. Opening an IRA CD provides you with a tax-advantaged, low-risk, guaranteed rate of return, therefore giving you peace of mind that your retirement funds are safe and secure.
But don’t wait to open or add to your CD. Today’s great rates may be gone by April 15, the Tax-Day deadline to make contributions to your IRA for the prior year.
What is an IRA CD?
An IRA gives you the ability to create a retirement fund in which you can grow funds in stocks, bonds, or in this case, CDs. You can either pay income taxes before depositing into an IRA account (Roth IRA) or when you withdraw funds from the IRA account (Traditional IRA) for retirement. When you open an IRA CD, your IRA (retirement funds) benefits from the advantages of a CD – setting a fixed term and a fixed interest rate, thereby locking in a higher rate of interest than a savings account and many other investments. The rate stays locked in the CD’s initial term even if interest rates go down. Once your IRA CD reaches its maturity, you not only have the initial deposit but the interest you’ve earned.
Why Should I Open an IRA CD?
An added benefit is that if you open your IRA CD at a bank or credit union, your IRA funds will be insured by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Association) for up to $250,000 or more, based on account ownership structure. The guaranteed fixed rate and insurance protection are safeguards to protect your IRA funds for when you need them the most – retirement!
Why Open Now?
Observers believe we have reached the end of interest rate increases. According to Money.com, “Fed officials have signaled at least three rate cuts in 2024, with some analysts expecting upwards of six cuts. According to FedWatch, most investors currently expect the year to close out with interest rates in the 3.5% to 4.25% range.”
But it’s not too late to get the best cd rates or to contribute to a 2023 IRA CD account. Many banks and credit unions are still offering 5% or higher rates on their CDs. Act now, before rates go down. Locate your financial institution of choice, choose your IRA plan type (Traditional or Roth), and open an IRA CD account to lock in a competitive fixed CD rate. IRA funds need to be deposited before Tax Day (April 15, 2024) for a 2023 IRA contribution.
Pros and Cons of IRA CDs
It’s important to know that not all financial institutions offer IRA CDs, but when you do find an available opportunity, here are a few things to consider before you open an IRA CD account:
| PROS | CONS |
| Secure Returns: An IRA CD offers predictable returns compared to stocks, bonds, and other savings accounts. This provides the IRA accountholder the peace of mind of knowing how much they will earn at the CD maturity. This helps them plan more accurately. | One-Time Deposit: IRA CDs allow you to only contribute a one-time deposit that will stay in the account during its term (unless you open an add-on CD). You are allowed an annual maximum IRA contribution of $6,500 or $7,500 if you’re 50 or older for tax year 2023. |
| Generally Higher Interest Rates: CDs typically pay higher rates than savings and many other accounts. | Limitations: You are limited to how much you can contribute to an IRA annually |
| Tax Advantages: IRA CDs do not require you to pay taxes on interest earned during the tax year unless you withdraw funds. However, for a Roth IRA CD, your interest may be tax-free if you meet Roth IRA withdrawal rules. You may also be able to deduct your IRA annual contribution if you meet the Traditional IRA deductibility rules. Note: Please consult your tax advisor to make sure you’re eligible to deduct contributions. | Accessibility: Locking in an IRA CD for a fixed term gives you little to no access to your funds in case of an emergency. You are advised to keep funds in the account until it’s matured to avoid early withdrawal fees. |
| No to Low Fees: CDs typically do not require any setup or maintenance fees, but you can incur an early withdrawal penalty fee if you withdraw funds before your CD matures. | Fees: Depending on the financial institution, you can incur early withdrawal fees if you take out funds before the CD matures. You may also pay a 10% IRS penalty if you withdraw from an IRA before age 59.5. You can be charged both fees if you withdraw before the IRA CD matures and before you turn 59.5. Some financial institutions may charge set-up fees for the IRA. |
Final Thoughts from Our Ratewatchers
An IRA CD is a great way to protect your retirement savings in a risk-free account that offers competitive rates and tax-deferred growth. Consider what type of IRA (Roth or Traditional) is ideal for you based on your income and preferred tax benefits and find the term to best help you reach your retirement savings goals.
Disclaimer: This is not intended as tax or legal advice. Please consult your tax advisor or financial planner to understand how these topics may affect your individual financial situation.
FAQs
What is an IRA CD?
An IRA CD is a retirement fund that provides you with a tax-advantaged, low-risk, flexible cash flow, with generally higher returns. Why should I open an IRA CD now?
To take advantage of annual IRA contributions for the prior year and current high CD rates, open an IRA CD prior to Tax Day (April 15, 2024) and before CD rates potentially drop in 2024.
Why should I open an IRA CD now?
To take advantage of annual IRA contributions for the prior year and current high CD rates, open an IRA CD prior to Tax Day (April 15, 2024) and before CD rates potentially drop in 2024.
