One of the products that has been pushed recently is the IRA CD. Many banks and credit unions have begun offering products labeled “IRA CD.” In some cases, an IRA CD can be a good deal. But it is important to remember that an IRA CD works like any other CD, and you should also realize that you can hold any CD in an IRA — it doesn’t have to be something specifically marketed as for IRAs.
Keeping CDs in Your IRA
If you are interested in adding cash to your IRA for safety or capital preservation, you can use CDs. You might be able to get higher rates than you would for holding some other savings cash products in your IRA, and you get the same tax advantage as an IRA. If you keep your CD in a traditional IRA, you don’t pay taxes on your interest earnings until you withdraw the money. If you have a Roth IRA, you don’t pay taxes on your interest earnings at all.
Some banks and credit unions automatically add the interest you earn to your CD account each year. You don’t receive the money, but since it was issued during the year, you have to pay taxes on it for that year. As a result, being able keep a CD in a tax advantaged account can help you avoid that unpleasantness.
Does It Have to be an IRA CD?
The good news is that you can hold any CD in an IRA. However, it doesn’t hurt to check into the offerings available for IRA CDs. You want to shop around for the best CD rates no matter where you plan to hold them. And IRA CDs can have attractive terms. They usually come with longer terms, such as seven to 10 years, and they also usually have higher interest rates. Some IRA CDs have interest rates of more than 3.50% if you have a one that is 10 years. However, you might find that you have to deposit a higher minimum at some financial institutions. Plus, there are 10 year CDs, without the label “IRA”, that have just as high rates.
IRA CDs can be useful, and they could have their place in your retirement account, but you shouldn’t be blinded by the way they are marketed. Carefully consider what works best for you, and do some comparison shopping about interest yields. If you decide you want to add CDs to your IRA, consider all your options.