Certificates of Deposit (CDs) and Individual Retirement Accounts (IRAs) are two ways to earn money from your funds. However, IRAs are long-term investment accounts that provide tax advantages and help you fund your retirement, while CDs are typically short-term investments that offer modest returns and mature after five years or less. Learn more about the differences between a CD and an IRA and when you might choose one over the other.
What’s the Difference Between IRAs and CDs?
CD IRA
Account Type Specialized savings account Retirement investment account
How It Works You deposit a specified amount of money for a set period to earn interest. You hold investments like bonds, stocks, and market-traded funds in an IRA and benefit from tax advantages.
Terms One month to five years. Withdrawing before age 59½ typically incurs a tax penalty.
Types Traditional CD, High-yield CD, Market-linked CD, Jumbo CD, Liquid CD, IRA CD, Medium-term CD, Additional CD Traditional IRA, Roth IRA, SEP IRA, Payroll deduction IRA, SIMPLE IRA, Self-directed IRA
Early Withdrawal Penalties Yes, in most cases Yes, in most cases
Minimum Deposit Depends on the institution Depends on the institution
Maximum Deposit Depends on the institution Yes, set annually by the IRS
Federal Insurance Coverage Yes, up to $250,000 per depositor, per institution Yes, up to $250,000 per depositor, per institution
Tax Benefits No Yes
Income Limits No Yes, for some IRAs
Which is Right for You?
If you’re looking for a long-term investment plan to help you save for retirement and don’t have a 401(k) from your employer, an IRA is a good option. It allows you to save money gradually over the years and generally earns you more interest compared to what you can get from CDs.
Once you turn age 59½, you can start withdrawing funds without penalties. You will get the most out of your IRA if you start investing early in life, fully utilize tax deferred on your contributions, and make the maximum allowed contribution each year. However, contribution limits limit your ability to invest, so your IRA can only grow to a certain extent.
CDs offer a short-term investment option with lower yields but fewer restrictions. If you have cash that you want to keep easily accessible while still wanting it to grow, you can turn to CDs with terms ranging from one month to five years. The CD ladder strategy is a popular approach where investors purchase a mix of short and long-term CDs to enhance liquidity while achieving the highest interest rates.
Conclusion
Both CDs and IRAs can play a significant role in your investment strategy. IRAs are great plans to implement as part of long-term retirement savings. At the same time, CDs can help you earn interest in the short term.
Frequently Asked Questions (FAQs)
Which is better, IRA or CD?
It depends on what stage of life you are in. If you are looking for a long-term investment that you can use in retirement, IRAs are generally the better choice. If you want a short-term investment with low risk, CDs are a good option.
What’s the difference between a CD account and an IRA account?
CDs tend to have lower annual interest rates and terms usually ranging from a few months to five years, although terms can be longer. IRAs are retirement accounts with more complex rules and tax benefits. Generally, IRAs earn more over time compared to CDs.
Source:
https://www.thebalancemoney.com/cds-vs-ira-which-should-i-choose-5223353
Leave a Reply