IRA vs. CD - Which one is right for you? (2024)

FAQs

Is it better to put your money in an IRA or CD? ›

Broadly speaking, an IRA will usually make more money than a CD. This is because there is a wide assortment of investment options to choose from within an IRA. Be mindful that while there is greater growth potential in an IRA, there are also greater risks and the potential risk of loss of original capital.

Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.

Depending on your financial situation and the type of IRA you choose, contributions you make now can lower your taxable income, helping you save at tax time. And funds in your IRA grow and compound faster because they aren't taxed. So you can end up with more savings down the road.

401(k)s offer higher contribution limits.

The employer-sponsored plan allows you to add much more to your retirement savings than an IRA – $23,000 compared to $7,000 in 2024. Plus, if you're over age 50 you get a larger catch-up contribution maximum with the 401(k) – $7,500 compared to $1,000 in the IRA.

So if you have enough money right now to max out your IRA — or even just a good chunk of change you could put in — put in that big contribution as soon as you can. The research supports investing the whole amount at once, up front, to take max advantage of all the time you have.

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more. 6.

Then when you're retired, defined as older than 59 ½, your distributions are tax-free. They are also tax-free if you're disabled or in certain circ*mstances if you're buying your first home. In contrast, for a traditional IRA, you'll typically pay tax on withdrawals as if they were ordinary income.

When an IRA CD matures, you can renew your CD term length, move funds into a new CD term, move funds into a new financial institution's IRA or withdraw funds if you're of retirement age. 14 If you're closing a traditional IRA CD at maturity and taking out the funds, you'll pay taxes on your withdrawals.

IMPORTANT NOTE: You cannot borrow against your IRA account as you can with a 401(k) plan. You also cannot use the account to secure a loan. IMPORTANT NOTE: Unlike qualified retirement plans, the money you have in an IRA may not necessarily be protected from your creditors.

Is it good or bad to have an IRA? ›

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73.

It can pay to save in an IRA when you're trying to accumulate enough money for retirement. There are tax benefits, and your money has a chance to grow. Every little bit helps. If your employer doesn't offer a retirement plan—or you're self-employed—an IRA may make sense.

Charles Schwab is one of the best overall IRA providers, with high-quality customer service, no account minimum and low fees. The company offers a large selection of no-transaction-fee funds, gives users access to extensive research and charges no commission for stock, options and ETF trades.

If you only keep your IRA in cash, you may not grow your balance as much as you would with stocks. That could leave you short on funds by the time retirement rolls around. Investing your money in stocks is the best way to grow it for retirement.

Spreading your investments among different asset classes such as stocks and bonds can help reduce the risk of market volatility causing a slump in one asset class that might cause you to lose money. Similarly, investing in a number of different companies within an asset class spreads the risk.

Contributions to a traditional IRA can reduce your adjusted gross income (AGI) for that year by a dollar-for-dollar amount. If you have a traditional IRA, your income and any workplace retirement plan you own may limit the amount by which your AGI can be reduced.

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73. With traditional IRAs, you're investing more upfront than you would with a typical brokerage account.

Treasury bills, notes, and bonds

The federal government raises money by issuing Treasury marketable securities. These securities are backed by the U.S. government, so they're as safe as it gets. They earn a fixed income rate, and rates are high right now. Some of them are earning over 5%.