When planning for retirement, an IRA CD may be a safe way to grow your savings, reduce your tax liability, and lock in predictable growth. However, earnings are sometimes modest compared to other investment instruments, such as annuities.

This article will explore the benefits and limitations of IRA CDs and compare them to annuities.

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What’s an IRA?

An individual retirement account (IRA) is a tax-advantaged retirement account designed to help people save for retirement. An investor contributes money to an IRA and within the account can purchase from an array of different financial products, such as CDs, annuities, bonds, and stocks.

There are two main types of IRAs:

• Traditional IRA: You contribute pre-tax income, which leaves more money in your account to earn interest, potentially growing your savings faster. However, since you didn't pay taxes upfront, you’ll owe income taxes on both the principal and earnings when you withdraw the funds in retirement.
• Roth IRA: You contribute after-tax dollars, meaning you've already paid income tax on the funds. If the account has been open for at least five years and you're 59½ or older, you can withdraw both contributions and earnings tax free.

What’s a CD?

A certificate of deposit (CD) is a contract between an investor and a bank or credit union. To open a CD, you deposit a lump sum into an account for a set term, which typically ranges from three months to five years. In exchange, the institution pays a higher interest rate than it would for a traditional savings account. 

This investment is often a secure choice, as many CDs pay a fixed interest rate. And the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insure CDs for up to $250,000.

What’s an IRA CD?

An IRA CD is a certificate of deposit held within an individual retirement account. Typically offered by banks and credit unions, this option gives you the tax advantages of an IRA and the security of a CD in a single investment. You can deposit money into the IRA CD for a fixed term, such as one or five years. For that term, the bank will pay a guaranteed interest rate. Your funds will be essentially locked until the CD reaches maturity, but you can opt to pay early withdrawal fees and/or IRS penalties for withdrawing before age 59½.

Pros and cons of IRA CDs

IRA CDs are a strong investment option, but as with any savings vehicle, they also have drawbacks. Consider the following before opening one of these accounts.

Pros of IRA CDs

Guaranteed interest

IRA CDs often offer a fixed interest rate, so you’ll earn the same amount of interest over time, even during market downturns. This guaranteed interest ensure predictability, making retirement planning easier.

Higher interest rates

Interest rates are much higher than traditional savings accounts. IRA CDs tend to accumulate around 3–5% per year, while conventional savings accounts usually earn less than 1% annually. To increase the interest amount further, invest in longer-term CDs, as they tend to offer better rates.

Tax advantages

IRA CDs let you defer taxes on your investment or avoid paying taxes on interest entirely. 

No or low fees

CDs aren’t actively managed accounts, so there are usually no or low fees.

Compounding interest

Compound interest occurs when the bank adds the interest you’ve earned to your principal balance. This allows you to earn interest on both your original deposit and the accumulated interest, helping your savings grow faster.

Cons of IRA CDs

Low long-term growth

IRA CDs are safe investments, but this security comes at a cost. Because there’s little risk, the yield on IRA CDs is typically lower than that of other investments.

Early withdrawal penalties

While IRA CDs are intended for retirement savings, there may be unexpected circumstances when you need access to your funds earlier. Unfortunately, most CDs have early withdrawal penalties that you’ll need to pay if you take out money prior to maturity — or retirement. 

IRA CD withdrawal rules add another layer: If you’re under 59½, you’ll usually pay a 10% IRS early withdrawal tax penalty on top of any bank fees. This can significantly reduce your overall earnings, so it’s important to understand the full cost before accessing your funds prior to age 59½.

Confusing variations

There are several types of IRA CDs, each with different features depending on the bank or credit union. 

For instance, some offer a bump-up option, which lets you raise your interest rate once during the CD’s term if rates go up. Others may be callable, which gives the bank the right to close the account early if interest rates drop.

Because the terms can vary widely, it’s essential to read the fine print before committing to any IRA CD.

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IRA CDs vs. annuities

Like CDs, annuities offer predictable returns and tax advantages. But there are differences between the two. 

An annuity is a contract with an insurance company. You invest either a lump sum or a series of payments, and in return, the insurer provides for a series of payments for guaranteed income in the future, typically during retirement. Payouts can begin immediately or at a future date, depending on the type of annuity.

Here’s how IRA CDs and annuities differ: 

• Principal protection: IRA CDs are insured by the FDIC or NCUA up to $250,000, offering strong principal protection. Annuities, on the other hand, are backed by the issuing insurance company. 
• Growth rate: FAnnuities can provide higher growth than CDsYou can select from different annuity types — such as variable and indexed — which may allow your money to grow faster depending on market performance, but with a variable product your principal is not protected
• Payout structure: IRA CDs typically pay out in a lump sum when they mature. Annuities can pay out either as a lump sum or as a series of regular payments should you elect to annuitize, and withdrawals may continue even after your principal runs out, if you add a rider to your contract. 
• Flexibility: IRA CDs require a one-time lump-sum deposit and usually don’t allow additional contributions. In contrast, some annuities offer more flexibility: You can also select from various payout options and customize your income stream to suit your savings goals.

Gainbridge’s annuities, like SteadyPace™, offer guaranteed growth options that could provide greater growth opportunity and more flexible payout than traditional CDs.

Gainbridge’s annuities may be a better way to build your savings

IRA CDs are a safe, reliable way to build your retirement funds — but they may lack flexibility. Annuities offer many of the tax benefits of IRA CDs, but they may provide for better growth opportunities and put you more in control of your retirement account. And with Gainbridge, you’ll never owe hidden fees or commissions. Visit Gainbridge to learn more about SteadyPace™, or our other annuity products.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Annuity guarantees are subject to the financial strength and claims paying ability of the issuing insurance company. Annuities are issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force. You should carefully review the contract terms prior to contributing to an annuity.