Comparing IRA vs. Certificate of Deposit: What's the Difference?

Jan 05, 2024 By Susan Kelly

CDs and IRAs may help you make money. Individual Retirement Accounts (IRA) are long-term investment accounts that provide tax benefits and help you save for your future. CDs are low-risk investments that typically have a five-year tenure. Learn more about the distinctions between a certificate of deposit and an individual retirement account and when you may pick one over the other. This guide compares IRA vs. Certificate of Deposit: What's the Difference?

Account Type

You deposit a specified amount of money in a CD for a defined time to earn interest. Many other types of assets may be held in an IRA, including CDs, equities, and bonds. An IRA is a tax-advantaged retirement account.

How It Works

When you put money into a CD, you receive interest for a certain time, known as a term. You collect your deposit plus interest when the account matures. An IRA contains CDs, equities, bonds, and other assets. An IRA, on the other hand, does not allow you to carry life insurance or collectibles. When you retire, you'll start withdrawing from your IRA.


CDs typically have maturities of one month to five years; however, this may vary. You can't usually get your money out of CDs until the conclusion of the term. Following the IRA's stated purpose, you must wait to take money out of an IRA until you reach the age of 59. However, early withdrawals may be taxed and penalized by a 10% penalty charge if you are under 70.

Tax Implications

The tax treatment of IRAs and CDs is another major distinction. Tax advantages for investors might vary based on the kind of IRA they choose. Traditional IRA contributions are tax-deductible if you fulfill income and filing criteria. In other words, you make a pre-tax contribution, and the money you invest grows tax-free. Once you start taking money out of your account, you must start paying taxes. It works the other way around: You pay taxes on your contributions now, but you'll get tax-free income when you retire.

CDs, however, do not qualify for any tax advantages. However, you may have to pay taxes on any interest income. You'll get a Form 1099-INT from your financial institution if you receive interest in your investment. Any interest income above $10 must be reported to the Internal Revenue Service (IRS). Pay attention to the fact that you don't have to pay taxes on your principal amount.

Early Withdrawal Penalties

Both CDs and Individual Retirement Accounts (IRAs) have early withdrawal penalties. You may be subject to an early withdrawal penalty if you take money out of a CD before the maturity date. PenFed Credit Union's six-month CD has a 90-day early withdrawal penalty. If you take any money out of an IRA before the age of 5912, you may be subject to a 10% tax penalty and have to report it on your income tax return.

Tax Benefits

Traditional CDs don't provide any tax advantages over other investment options. The year you receive interest is taxable income for tax purposes. Different types of IRAs provide different tax benefits, depending on the kind of IRA you choose. For example, payments to a standard Individual Retirement Account (IRA) may be partly or tax-deductible. Roth IRA donations aren't tax-deductible, but qualifying withdrawals are.

Which One Is Best for You?

If you don't have an employer-sponsored 401(k), an IRA may help you save for retirement. It's a great way to build up your savings over time while receiving a higher interest rate than you would on a CD. When you reach the age of 59 and a half, you are eligible to start taking withdrawals from your retirement account penalty-free. Your IRA will provide the biggest benefit as long as you're eligible for full tax deductions on your IRA contributions and contribute the maximum amount permitted each year. However, the contribution restrictions limit the amount you may invest, limiting the growth of your IRA.

Short-term CDs provide lower yields but fewer restrictions than long-term investments like mutual funds. There are CDs with periods ranging from a month to five years if you want to keep your money more liquid yet want it to grow. It is common for investors to acquire a combination of short- and long-term CDs to optimize liquidity and maximize interest rates.


Your investing plan may benefit from including certificates of deposit (CDs) and individual retirement accounts (IRAs). IRAs are a great way to save for your retirement over the long term. Other ways to earn interest on your money, such as CDs, which pay interest for shorter periods.

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