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What is an IRA CD?

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  • Written By: Luke Arthur
  • Edited By: C. Wilborn
  • Last Modified Date: 16 September 2016
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An IRA CD is a type of investment that is allowed within an individual retirement account (IRA). This provides the investor with a way to invest a specific amount of money for a defined period of time and receive a fixed rate of interest. One of the primary benefits of this type of investment is that it is extremely safe. One of the drawbacks of the IRA CD is that it generally pays very low interest, and investors are giving up bigger potential returns by not investing in other markets.

The term IRA CD is short for individual retirement account certificate of deposit. This is a type of retirement investment that is provided by most banks and other financial institutions. With this type of investment, the investor gives the financial institution a certain amount of money for it to use. The financial institution agrees to pay a fixed amount of interest at the end of a certain amount of time. Once the CD matures, the bank will give back the principal amount that was invested as well as the interest that was earned, or, if the investor chooses, roll the total over into a new CD.

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Many investors prefer to invest in an IRA CD because it provides them with safety. There are not many retirement investments that are as safe as an IRA CD, which is insured by the Federal Deposit Insurance Corporation (FDIC). This is the same type of protection that comes with putting money into a bank account in the US. If the bank that issued the CD goes out of business, the FDIC will step in and reimburse the amount that was invested up to $100,000 US Dollars (USD).

Even though this type of investment is extremely safe, there are a few potential drawbacks with it. Most significantly, the interest that is earned on an IRA CD is very minimal. Compared to other types of investments, the interest is only a fraction of what an investor could receive. For example, by investing retirement funds in the stock market or in mutual funds, an investor could triple or quadruple their returns when compared to a CD. This means that the IRA CD is an investment that is best suited for individuals who are getting close to retirement instead of trying to grow a portfolio.

Another disadvantage of the IRA CD is that there are penalties for cashing them out early. If the investor needs the money before the CD matures, the bank will charge a early distribution penalty. Most of the time, this negates any interest that was earned in the first place.

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