The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Certificates of deposit generally get used as a short-term savings vehicle for goals such as upcoming home or car purchases. If you’re near or in retirement, you might wonder if CDs fit there too. And there’s even a type of CD designed for retirement funds called an IRA CD.
If you’re risk averse in your investing, CDs can be appealing. Safety is central to them: CDs offer predictable returns, federal deposit insurance and no volatility in value such as in the stock market. In short, they’re reliable and straightforward investments.
But CDs aren’t the most flexible among low-risk savings options. Here’s an overview of IRA CDs and some quick tips for how to use CDs for retirement.
What is an IRA CD?
An IRA CD is a tax-advantaged account invested in CDs. It’s technically a combination of two different financial accounts: An individual retirement account and a certificate of deposit. You can think of an IRA as the overall container and one or more CDs as the investments inside. IRA CDs provide tax benefits for money you’re dedicating to retirement and putting into CDs.
As with standard IRAs, IRA CDs have at least two different types: Traditional and Roth IRAs. The difference is based on when you’re taxed: Traditional IRAs let you reduce taxable income on contributions and you pay taxes later. Roth IRAs make you pay taxes on contributions initially and your future withdrawals, including interest earned, is tax-free.
Expand to see a list of banks and credit unions with notable IRA CD rates
Click to see our reviews of financial institutions with IRA CD rates:
Note: IRA CD rates are often comparable, if not the same, as what a bank or credit union offers on its regular CDs.
Consider IRA CDs to reduce taxes on interest
CD interest gets taxed at the same rate as regular income for the year you earned that interest. For example, having $10,000 in a one-year CD at 4% APY would earn you $400 in interest, so you’d be taxed on that $400. However, you can reduce your tax burden with IRA CDs.
» Learn more about what to know when paying taxes on interest or bank bonuses
For most of the last decade or so, CD rates were at rock-bottom lows and the tax burden for CD interest was minimal. But that’s changed with higher rates in recent years and with those higher yields comes the possibility of a more notable tax impact.
» Skip down to see FAQs about IRA CDs
5 other ways to use CDs in retirement
1. Focus on short-term “extra” savings for CDs
Whether you’re near retirement or not, an emergency fund tends to be the most important goal for short-term savings. Having three to six months’ worth of living expenses, or more, in a regular savings account tends to be a common recommendation. CDs aren’t best for emergency cash because they require locking up a fixed sum for a period, typically ranging from three months to five years.
CDs are more a secondary priority, intended for short-term savings beyond the amount needed for emergencies. CD yields are traditionally higher than what other bank accounts offer, giving them an incentive as a place to leave some money alone within a specific time frame.
2. Consider a CD ladder
Having a CD’s fixed rate during a high-rate environment can mean steady, solid returns for years. But in exchange, you lose access to funds for the term.
One workaround to keep your money occasionally accessible is a CD ladder. Instead of one CD, divide an investment into equal amounts and put them into CDs of staggered term lengths, such as one year, two years and three years. Shorter terms work, too: three months, six months and nine months. The idea is that you can access some cash each time a CD matures, while letting the rest of an investment grow.
3. Compare rates at banks or a brokerage
Your bank’s CDs might be convenient, but they don’t always beat the top CD rates offered by other institutions. Online banks and credit unions tend to have some of the best CD rates, and their opening minimum deposits are often low, such as $1,000 or less. Current high-yield rates are around 4% annual percentage yield for six-month and one-year terms, while longer-term rates such as for three and five years are closer to 3.75%, according to NerdWallet analysis in April
You can also find competitive yields with brokered CDs, which are issued by banks and available at a brokerage. You need a brokerage account and some understanding of how these CDs work, though. Brokered CDs have the most benefits for savers with a lot of funds planned for CDs. For example, a brokerage can spread funds across multiple banks and credit unions to avoid hitting the $250,000 cap for federal deposit insurance, which protects your money if a bank fails.
4. Avoid withdrawing early
You generally can’t redeem CDs early without hassle or cost. At banks, CDs’ early withdrawals often come with a penalty, such as months to years’ worth of interest earned. A bank may let you withdraw interest early from a CD, but you’d lose out on the full amount a CD can earn from compounding interest. An early withdrawal from an IRA also can trigger a tax penalty, so IRA CDs can have up to two penalties: One from the CD, one from the IRA. (Skip down to the FAQ section for more details.)
At brokerages, you can leave a CD early by selling, but you risk losing some of the original value if current rates are higher than your CD’s rate.
Once a CD ends, there’s a grace period, typically seven to 10 days long, when you can withdraw the full amount without a penalty. Alternatively, you can consider a no-penalty CD, though rates tend to be lower than for high-yield CDs at the same bank.
5. Avoid putting too much money in CDs
The safety of CDs can be attractive, but you don’t want to overuse CDs. The inability to access CD funds means closing yourself off from other opportunities to use that money. A high-yield savings account, for example, might be more appropriate as a continuous option to get a decent rate while not locking up funds.
» Dive deeper: How much money should go into CDs
Another low-risk investment alternative to CDs, money market funds, can have comparable returns with easier access to cash for brokerage customers. And within an investment portfolio, stocks and bonds play bigger roles than cash investments such as CDs do over time. Stocks historically have provided the greatest likelihood for strong returns while bonds balance out stocks’ volatility with more stability. CDs don’t always protect against inflation, which can occur when inflation rises while you’re locked into a lower CD rate.
Don’t rule out CDs for retirement savings — just know when to use them.
Frequently Asked Questions
Are CDs good for retirement?
CDs can provide a solid way to preserve wealth, especially for the risk-averse retiree. The predictable returns and inability to access funds during a predetermined period make CDs a straightforward savings vehicle. However, CDs are just one low-risk investment. Asset allocation can be a helpful framework to figure out how CDs may or may not fit into your overall financial picture.
How do IRA CD rates work?
IRA CDs earn interest just like standard CDs. Rates are generally fixed and quoted as an annual percentage yield, or APY, which shows the amount an account earns in one year, including compound interest. The higher the APY, the more your money will grow. One big difference is that there are annual contribution limits to IRAs, which include IRA CDs.
When should I get an IRA CD?
IRA CDs tend to be a decent option for people looking for guaranteed returns on their retirement savings, especially if retirement is only a few years away. These CDs are useful for those who can’t stomach the risks that come with stocks or bonds. Money in a CD is federally insured up to $250,000 (or $500,000 for joint accounts).
Younger investors can afford to take more risk with their investments, so they generally wouldn't want to tie up retirement funds in CDs only, if at all. Current CD rates don't compare to the return that investments can make in the long term.
How should I fund an IRA CD?
You have two main options: You can transfer or roll over money from another retirement account, such as an IRA or 401(k), or add new money. If you choose the second option, note that IRAs have annual contribution limits: $7,500 if you’re under 50 and $8,600 for those 50 or older. These are the combined limits for all IRAs you add money to in tax year 2026.
What happens if I withdraw early?
You might face two penalties. Pulling money out of a CD before its term expires will likely result in an early withdrawal fee, which is typically a percentage of the interest earned. You could also face an IRS tax penalty (such as 10% of the withdrawal). For a Roth IRA, the penalty only occurs with an early withdrawal of earnings, not contributions.
This penalty could occur if you withdraw the money at the end of its term and deposit it into a non-retirement account without meeting a few requirements that qualify you for IRA distributions. For either a traditional or Roth IRA, you have to be older than 59 1/2, or you have to use the money for specific purchases, such as buying a home or funding higher education (see other exceptions). If it's a Roth IRA, you can withdraw your contributions — but not the earnings — at any time without an IRS penalty.
Is there a difference between an IRA offered at a bank and one at a brokerage?
Generally, yes. Banks, especially those that don’t have investment accounts, may provide IRAs with limited choices. For example, a bank IRA might offer only CDs and other types of savings accounts. IRAs at brokerages can hold a wider variety of investments, including stocks and bonds, which tend to provide higher returns over the long term.
Can you lose money in an IRA CD?
No, there’s no risk of losing money in an IRA CD like there is with the stock market. However, if you decide to withdraw early from an IRA CD, you might have to pay up to two penalties for the privilege: a CD penalty from the bank and an IRA tax penalty.
