CD vs. IRA: Which Should I Choose?

Your savings goals will help you decide between a CD and an IRA

A parent and child talk about money at a kitchen counter. The child holds $20 bills and the parent holds paperwork.

kate_sept2004 / Getty Images

Certificates of deposit (CDs) and individual retirement accounts (IRAs) can help you earn money with your money. However, IRAs are long-term investment accounts that offer tax advantages and help you fund your retirement, whereas CDs are usually short-term investments that provide modest returns and mature after five years or less. Learn more about the differences between a CD and an IRA, and when you might choose one over the other.

Key Takeaways

  • CDs is a kind of savings-style account that typically have terms of five years or less and earn low interest rates.
  • IRAs are retirement accounts that are more complex than CDs.
  • You can deposit more into a CD in one year than you can in an IRA.
  • CDs can work for short-term savings goals, but IRAs tend to be a better fit for a long-term retirement plan.

What’s the Difference Between IRAs and CDs?

Account type Specialized savings account Retirement investment account
How it works You deposit a fixed amount of money for a set term to earn interest. You hold investments such as bonds, stocks, and exchange-traded funds in the IRA and receive tax advantages.
Terms One month to five years Withdrawals before age 59½ often incur a tax penalty
Types Traditional CD, high-yield CD, market-linked CD, jumbo CD, liquid CD, IRA CD, brokered CD, add-on CD Traditional IRA, Roth IRA, SEP IRA, payroll deduction IRA, SIMPLE IRA, self-directed IRA
Early withdrawal penalties Yes, in most cases Yes, in most cases
Minimum deposits Depends on institution Depends on institution
Maximum deposits Depends on institution Yes, set by IRS each year
Federal insurance coverage Yes, up to $250,000 per depositor, per institution Yes, up to $250,000 per depositor, per institution
Tax benefits No Yes
Income limits No Yes, for some IRAs

Account Type

A certificate of deposit (CD) is a type of savings account in which you deposit a fixed amount of money for a fixed term to earn interest. An IRA is a retirement account that offers tax advantages and can hold a variety of investments, which can include CDs, stocks, bonds, and more.

How It Works

With a CD, you earn interest by leaving your deposit in the account for a set period, known as a term. When the account matures, or reaches the end of the term, you get your deposit back plus the interest your money earned.

An IRA acts as a basket that holds your investments, which can include CDs, stocks, bonds, and more. However, you can’t hold life insurance or collectibles in an IRA. You’ll let your investments grow until you retire, when you’ll begin to make withdrawals from your IRA.


CDs have terms that usually range from one month to five years or longer. With most kinds of CDs, you generally can’t access your money until the end of the term.

Because IRAs are designed as retirement savings accounts, you’ll need to wait until you’re at least age 59½ to withdraw money. You can withdraw funds before that age, but early distributions may be taxed and you may pay a 10% penalty fee.


You’re typically required to start taking withdrawals from a traditional IRA when you reach age 72.


Both CDs and IRAs come in a variety of types. The main types of CDs include:

  • Traditional CD: Traditional CDs have fixed terms and guaranteed interest rates if you keep your deposit in the account until it matures.
  • High-yield CD: High-yield CDs are like traditional CDs, but offer higher-than-average interest rates.
  • Market-linked CD: Instead of offering a fixed interest rate, a market-linked CD offers a variable rate based on market measures such as commodities or indexes.
  • Jumbo CD: Jumbo CDs require a large minimum deposit, such as $100,000.
  • Liquid CD: Also known as no-penalty CDs, liquid CDs don’t have early withdrawal penalties, so you can access your money before the end of the term without incurring a fee.
  • Brokered CD: Brokered CDs are sold by financial intermediaries instead of directly by banks or credit unions.
  • Add-on CD: Add-on CDs allow you to continuously add funds to your CD throughout your term.


You might also come across an IRA CD, which is a CD held in an IRA.

IRAs also come in a range of options:

  • Traditional IRA: Traditional IRAs offer tax-deductible contributions, and your qualified distributions are taxed at the time of withdrawal.
  • Roth IRA: With Roth IRAs, your contributions aren’t tax-deductible, but your qualified withdrawals in retirement are tax-free.
  • SEP IRA: A SEP IRA is a Simplified Employee Pension plan that lets business owners contribute to retirement plans for themselves and their employees.
  • Payroll deduction IRA: Payroll deduction IRAs enable employees to have their IRA contributions automatically deducted from their paychecks.
  • SIMPLE IRA: A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a plan that lets employers and employees contribute to traditional IRAs for employees.
  • Self-directed IRA: Self-directed IRAs let you invest in a broader set of assets than traditional IRAs.

Early Withdrawal Penalties

Penalties for an early withdrawal apply to both CDs and IRAs. With CDs, you’ll often face an early withdrawal penalty if you remove money from the account before the maturity date. For example, a bank may charge you three months of interest if you withdraw money from the CD.

If you withdraw any amount from an IRA before turning 59½ years old, you’ll often be charged a 10% tax penalty and be required to include the distribution in your gross income.

Minimum Deposits

Both CDs and IRAs can have minimum deposit requirements. However, these will depend on the financial institution you choose.

Maximum Deposits

The bank or credit union issuing your CD will limit how much you are allowed to deposit. For example, a bank might allow you to deposit up to $2 million, not including interest.

When it comes to IRAs, deposits are limited by the IRS, which sets a maximum contribution limit each year. In tax year 2022, you can’t contribute more than $6,000 if you’re under 50 years old, or more than $7,000 if you’re 50 or older. Those limits are $6,500 and $7,500 in 2023.


You can’t contribute more than your taxable compensation for the year. Depending on your type of IRA, your filing status and income may also result in a reduced contribution limit.

Federal Insurance

Both CDs and the accounts held in IRAs can be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) up to $250,000 per depositor, per institution. That means deposits owned by the same person at the same bank or credit union are added together and the total is insured up to $250,000. IRAs and savings accounts (such as CDs) count toward separate $250,000 totals.

You may notice that $250,000 is less than the maximum deposit allowed by some financial institutions. That means any deposits over $250,000 wouldn’t be insured.

Tax Benefits

Traditional CDs don’t come with any special tax benefits. Any interest you earn counts as taxable income in the year you receive it.

IRAs offer tax advantages that vary based on the type of IRA you choose. For example, traditional IRA contributions may be partially or fully tax-deductible, and you’re only taxed when you withdraw money in retirement. Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free.

Income Limits

Issuers of CDS don’t typically have any income limits for depositors.

However, with Roth IRAs, your contribution limit can be affected by your income and filing status. For example, if you’re married filing jointly and made $214,000 or more in tax year 2022, you can’t contribute to a Roth IRA that year. While contributions to traditional IRAs aren’t limited by income, tax deductions on contributions can be reduced or disallowed if your income is above a certain amount, and you or your spouse are covered by an employer-sponsored retirement plan.

Which Is Right for You?

If you’re looking for a long-term investment plan that will help you save for retirement, and you don’t have a 401(k) from your employer, an IRA is a good solution. It allows you to gradually save over the years while, generally speaking, earning more interest than you can get from CDs.

Once you turn 59½, you can begin to take withdrawals without any penalties. You’ll get the most out of an IRA if you start investing early in life, qualify for the full tax deductions on your contributions, and make the maximum allowed contribution each year. However, the contribution limits cap the amount you can invest, so your IRA can only grow so much.

CDs offer a shorter-term investment option with lower returns but fewer limitations. If you have funds you’d like to keep more liquid but still want to grow, you can turn to CDs with terms from one month to five years. CD laddering is a popular strategy in which investors buy a mix of short- and long-term CDs to improve liquidity while maximizing interest rates.

The Bottom Line

CDs and IRAs can both play important roles in your investment strategy. IRAs are great plans to put into place as part of your long-term retirement savings. Meanwhile, CDs can help you earn interest on a shorter-term basis.

Frequently Asked Questions (FAQs)

Is an IRA or CD better?

It depends on where you're at in life. If you're looking for a long-term investment that you can use when you retire, IRAs are typically the better choice. If you want a short-term, risk-averse investment, then CDs are a good fit.

What is the difference between a CD and an IRA account?

CDs tend to have low APYs and terms that typically range from a few months to five years, although terms can be longer. IRAs are retirement accounts with more complex rules and tax benefits. Generally speaking, IRAs earn more over time than CDs.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “IRA FAQs,” see “Investments.”

  2. Securities and Exchange Commission. “Certificates of Deposit (CDs).”

  3. IRS. “IRA FAQs,” see “Distributions (Withdrawals).”

  4. IRS. “Retirement Plan and IRA Required Minimum Distributions FAQs.”

  5. IRS. “What if I Withdraw Money From My IRA?

  6. HSBC. “Online Certificate of Deposit FAQs,” see “What Is the Maximum Deposit That I Can Make to an Online CD?”

  7. IRS. “Retirement Topics—IRA Contribution Limits.”

  8. FDIC. “What’s Covered: Are My Deposit Accounts Insured by the FDIC?” See “Deposit Products,” “Single Accounts,” and “Certain Retirement Accounts.”

  9. IRS. “Amount of Roth IRA Contributions That You Can Make for 2022.”

  10. Beagle. "How Much Interest Does an IRA Earn?"

Related Articles