Best IRA CDs for Low-Risk Investors

Learn if and how IRA CDs can work for you.

People often associate individual retirement accounts with stock or bond investments. However, in the process of seeking the best investment, IRA account holders often overlook certificates of deposit. 

It’s easy to see why some holders ignore CDs and instead gravitate toward stock investments. The S&P 500 Growth Fund delivered an average return of 10.94% per year over the last decade, whereas the average interest rate on a one-year CD is only 0.37%. But for investors wary of putting their retirement funds in the sometimes volatile stock market, buying IRA CDs can be a source of safe returns. Read below to learn more.

What Is an IRA CD?

An IRA CD is simply an individual retirement account that invests all of its funds in certificates of deposit. IRA holders can put some or all of their money in a CD, and some banks have CDs they designate specifically for retirement savings. To better understand how these financial products work, here’s a brief explanation of both CDs and IRAs.

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How CDs Work

Certificates of deposit hold a fixed amount of money for a defined period, such as six months or five years. At the end of the term, the bank returns your funds to you, plus the interest earned over time. These funds enjoy the benefits of insurance protection from the Federal Deposit Insurance Corporation. The FDIC covers the account up to $250,000 per depositor and insured bank.

IRAs Defined

An IRA is a fund that lets account holders make tax-deferred contributions to boost their retirement savings, allowing the money to grow tax-free. Within the IRA, you can choose from several types of investment products such as stocks, mutual funds, bonds and CDs. Investors often want to spread their money among multiple kinds of investments to diversify their holdings.

How the money is taxed depends on the type of IRA. Traditional IRAs allow you to contribute pretax dollars into the account. This money is then taxed when you take distributions. With a Roth IRA, you contribute dollars that the IRS has already taxed. When you take distributions all of that money is tax-free. 

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While IRAs and CDs are not the same, they have one commonality: Both have lock-up periods. With a CD, the lock-up period lasts for the term of the certificate. In an IRA, the funds must remain in the account until age 59 1/2. If you withdraw money before that age, you’ll face an additional 10% tax penalty on top of what you might already owe except in special cases.

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5 of the Best IRA CDs

CDs often deliver interest rates below 1%, but with a little research, you can find rates exceeding that level. Here are five banks that offer annual percentage yields of 1.50% or above:

Best IRA CD Rates
Bank Rate (APY) Term Minimum Deposit
Alliant Credit Union 1.40%-1.50% 12-60 months $1,000
Ally Bank Up to 1.00% 3-60 months $0
Discover Bank Up to 0.80% 3-120 months $2,500

Synchrony Bank

Up to 0.90% 3-60 months $2,000
Vystar Credit Union 0.60%-1.75% 3-60 months $500

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Alliant Credit Union

The Alliant Credit Union IRA CD offers competitive rates regardless of terms or deposit amounts. Depositors earn between 1.40% and 1.50% APY regardless of whether they agree to a 12-month or 60-month term. The bank also requires a minimum deposit of $1,000.

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Why Consumers Like It: The $1,000 minimum deposit should make it affordable to most depositors. Also, the 1.40% APY for even the shortest-term depositors stands out over competing CDs that offer less than 1%.

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Ally Bank

As with most CDs, the Ally Bank IRA CD tends to offer higher rates for longer commitments. This APY ranges from 0.20% for a 3-month CD to 1.00% for a 60-month CD. However, Ally stands out by not requiring a minimum deposit.

Why Consumers Like It: Ally Bank still offers high interest rates for relatively short commitments. The 18-month CD pays a 0.70% APY, compared to 1.00% for the 60-month CD.

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Discover Bank

The Discover Bank IRA CD offers both short- and long-term CDs. Those who commit for less than a year will earn an APY of up to 0.45%, but the APY rises as high as 0.80% for longer terms. Discover Bank requires a minimum deposit of $2,500.

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Why Consumers Like It: Depositors who commit to at least 12 months will earn a 0.60% APY. That rises to a 0.80% APY for those who agree to a lock-up period of 120 months.

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Synchrony Bank

The Synchrony Bank IRA CD is similar to its peers in many respects. It pays as little as 0.25% for a 3-month CD but that rises to a 0.90% APY for those who commit to a 60-month term. You’ll need to make a minimum deposit of $2,000.

Why Consumers Like It: This CD’s rising APY stands out for terms of 12 months or longer.

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Vystar Credit Union

The Vystar Credit Union IRA CD offers APYs ranging from 0.6% to 1.75%. However, the APY goes to 1.15% with only a 6-month commitment. The minimum required deposit is $500.

Why Consumers Like It: The short-term rates come in ahead of most banks on short-term CDs. Also, the $500 minimum deposit makes CDs available to most depositors.

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Advantages and Disadvantages of an IRA CD

Whether you consider an IRA CD a “good” investment depends on your own investment needs and risk tolerance. These investment products hold both advantages and disadvantages for retirement-oriented investors.

Advantages

IRA CDs offer both safety and stability. Should a bank collapse, the FDIC will replace the full amount of your deposit up to $250,000. 

That protection — coupled with the fact that CDs don’t have management fees — make CDs attractive for low-risk investors. With the full value of the CD insured in most cases, finding the “best” CD is usually a matter of choosing the one with the highest interest rate and the longest acceptable lock-up period. 

In addition to safety, CDs offer stability — something you don’t always find with stocks. Stocks can bring significant gains, but when a company or business sector hits a rough patch, a stock can lose a considerable portion of its value in a short period of time. 

Disadvantages

Although CDs are low-risk, investors pay a high potential price for this safety and stability. In most cases the amount of return tends to closely correlate with the level of risk you accept. Since CD investments don’t have any significant risks, they also produce much lower returns than stocks, mutual funds and other types of investments.

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CDs also have a hard time keeping up with inflation. For example, those who invest more than $100,000 — the minimum amount for a “jumbo CD” — will earn an average annual return of 1.49% in a 60-month CD. To put that into perspective, the consumer price index increased by 2.3% over the last 12 months. This means that even if depositors are not “losing money” in the technical sense, they face a modest loss in purchasing power in IRA CDs. Even if you happen to earn some of the best CD rates available, you might struggle to find a return that outpaces inflation.

And while IRAs exempt you from taxes on the interest you earn, you’re not exempt from all penalties. If you take the money out of the CD before the maturity date, you’ll still face an early withdrawal penalty.

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Questions and Concerns About IRA CDs

If you’re considering an IRA CD, it’s important to learn how they work. These questions might resolve some of the confusion:

What Types of IRAs Are Eligible For CDs?

All types of IRAs allow CDs as an investment option. 

Who Do IRA CDs Best Serve?

IRAs CDs for low-risk investors are best-suited for those who are near retirement and need to keep their funds safe but also want a higher level of return than a standard savings account.

What Is the Contribution Limit on an IRA CD?

IRA CDs have the same contribution limits as other types of IRAs. For 2020, that contribution limit is $6,000 per year for everyone under 50 years old. Those who are 50 and older can contribute up to $7,000 per year.

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Should I Buy an IRA CD?

In times of low interest rates, IRA CDs for low-risk investors probably won’t provide the level of growth needed to fund your retirement. Even if you worry about stock market volatility, in most cases you have little choice but to become a stock market investor on some level. 

You probably don’t want to put all your retirement money into an IRA CD, but it’s fine to keep a portion of it in one. If you know you won’t need to touch the money for several years, it’s not a bad idea to put part of your IRA into a CD. 

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Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of March 26, 2020. 

Rates for Alliant Credit Union and Vystar Credit Union are accurate as of March 26, 2020.

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About the Author

Will Healy

Will Healy is a freelance business and financial writer based in the Dallas area. He has covered a variety of topics, such as stocks, real estate, insurance, personal finance and macroeconomics. In addition to GOBankingRates, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance and Seeking Alpha.

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