A certificate of deposit (CD) can make a lot of sense in your IRA, especially as you near retirement and lower your investment risk appetite. A CD is an interest bearing investment that is FDIC insured up to $250,000 per depositor. Normally the interest paid would be fully taxable each year, but a tax-advantaged account like an IRA allows you to defer paying taxes on this interest until you withdraw the money (Traditional IRA) or not pay taxes on the interest at all if you paid taxes on the principal up front (Roth IRA).
There are two types of institutions through which you can set up an IRA account to purchase CDs: Bank-affiliated IRAs and Brokerage IRAs.
If you open an IRA through a provider affiliated with a bank, that bank can offer you CDs directly. These account providers also offer stocks, bonds, and mutual funds that can be purchased in the same account as the CDs. Below are the current rates being offered at some of the most popular bank-affiliated IRA providers.
Current Bank-affiliated CD Rates:
|Account Provider||6 month||9 month||1 year||2 year||5 year||Bank|
|Sharebuilder||0.400%||0.400%||0.400%||0.400%||0.900%||Capital One 360|
|USAA – Standard||0.560%||0.660%||0.710%||0.810%||1.060%||USAA|
|USAA – Jumbo ($95k+)||0.610%||0.710%||0.760%||0.860%||1.110%||USAA|
|*Rates current as of April 2013|
You can also purchase CDs for your IRA if you have an account with a brokerage that is not affiliated with a bank, but gives you access to a marketplace of CDs, similar to a marketplace for stocks. The advantage to this approach is that you have the option of easily shifting your money between banks as rates change over the years. These “brokered CDs” are exactly identical to the CDs you would purchase directly from a bank and include the same FDIC insurance up to $250k.
NerdWallet recommends the Scottrade account for IRA CD investments because:
- No CD purchase fees – Scottrade charges no fees for CD purchases.
- Huge CD selection – Offers CDs from a few months up to 20 years.
- Access to the best CD rates – Because Scottrade is a brokerage, it gives its customers access to CDs from many banks instead of just one for bank-affiliated accounts. This allows investors to choose the CD with the best rate as rates change without having to transfer their account to a different bank, which can be expensive.
- Large Mutual Fund Selection – Most IRA investors also hold some mutual funds and Scottrade offers over 3,000 no-transaction-fee mutual funds across every asset class and risk level.
- Low cost per stock trade – At only $7/trade, Scottrade charges 30% less than most other popular IRA providers on stocks and ETFs.