IRA CDs carry a sense of confusion as to how they differ from traditional CDs, when they are fundamentally the same. Use this guide to clear the confusion between the two and learn how to best save for the future.

Understand The Basics

An IRA (individual retirement account) is simply an account through which you can invest in a variety of investments.

A CD (certificate of deposit) is a savings vehicle where the money earns interest and the money cannot be withdrawn until the specified maturity term is reached. Early withdrawals are subject to penalties.

Think of an IRA as a basket and the items you put in it are your investments, which most commonly include stocks, mutual funds, bonds, and even CDs. Depending on the bank or brokerage firm with which you open your IRA, you may be limited to a specific range of investment products – including which CDs you may invest in through your IRA.

The primary benefit of IRAs are the tax advantages. With a traditional IRA, saving in an IRA CD would reduce your taxable income. With a Roth IRA, all the interest you earned in an IRA CD is tax-free. On the other hand, a regular CD would mean you’d get taxed on interest income and receive a 1099-INT tax form at the end of the year.

IRA CDs are still subject to early withdrawal penalties and are also insured by the FDIC up to the maximum limit of $250,000 per depositor.

CD Rates Rarely Differ Between Deposit Accounts and IRAs

Usually, the CD rates for a regular CD and an IRA CD are the same. Take a look at some of the CD and IRA CD products currently tracked at

ProductBankAPY (as of 1/20/11)Minimum opening depositProduct Info
12-Month CDING Direct1.00%$0Product page
12-Month IRA CDING Direct1.00%$0Product page
24-Month CDDiscover Bank1.50%$2,500Product page
24-Month IRA CDDiscover Bank1.50%$2,500Product page

Big national banks may use higher APYs or lower minimum deposits to attract customers to open IRAs, which may charge an annual account fee.

What If Your Brokerage Isn’t Offering High IRA CD Rates

Don’t forget that you can have multiple traditional and Roth IRAs. If you already have an IRA with particular brokerage but their CDs are offering dismal APYs, you can open an IRA CD at another bank in search of higher CD rates. You should remember that you are still limited by the IRA contribution limits across all your IRAs.

For example, in 2011, someone may have contributed $4,000 to a Roth IRA at Bank of America. That person invested all of that money in high-risk investments such as stocks and mutual funds. Because the 2011 contribution limit is $5,000, this person can choose to open a 24-Month IRA CD at ING Direct with $1,000, which will be earning 1.25% APY.

What Happens When an IRA CD Reaches Maturity

Another common question is what happens when an IRA CD matures. Because the money invested in an IRA CD are subject to different taxation rules, you cannot simply withdraw the money for use and avoid taxes and penalties.

One option is to renew the IRA CD but some people may want to move this money into investments with chances of higher returns.

If the IRA CD is in an IRA that was opened through a brokerage firm that you want to stick with, you can choose not to renew and the money will end up as part of your IRA balance. If the IRA CD was opened at another institution, you can request a transfer or rollover to another IRA.

An IRA transfer is moving all the funds of an IRA at one brokerage firm to a new brokerage firm. IRA transfers are conducted between institutions and can be done as many times as you please.

An IRA rollover is taking the money from one IRA and adding it to the IRA funds you already have at another brokerage firm. The IRS allows only one rollover per year and it must occur within a 60-day time frame.

In the example above, when the 24-Month IRA CD at ING Direct matures and the person wants to put this money back into the Bank of America Roth IRA, a rollover must be completed. After ING Direct sends a check for $1,025.16 and this person must deposit it into the Bank of America Roth IRA in 60 days or there will be taxes and penalties incurred.

Compare the rates for regular CDs and IRA CDs by visiting the CD rates and IRA CD rates pages.

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