CDs are certificates of deposit offered by banks to give customers a higher rate of return in exchange for holding the money in the bank for a specified period of time. Bank customers can use a time certificate for regular savings, or they can keep the money in an Individual Retirement Account (IRA) for conservative retirement savings.
Defining Accounts
An IRA CD account is a long-term investment structure, designed to be held until at least age 59 1/2, that allows an investor to save money toward retirement. Non-IRA accounts are designed as personal savings accounts.
Tax Considerations
IRA CDs earn interest on a tax-deferred basis. You must pay taxes on the interest earned from non-IRA CDs annually.
Suitability
For those who are seeking to preserve capital in IRA accounts, a CD is a good option compared to stocks or mutual funds. Non-IRA CDs are suitable for people who have extra savings funds and want to get a higher rate of return on the money.
Time Frame
CDs have the same duration regardless of whether they are IRA CDs or not. Options may be anywhere from 3 months to 3 years in length.
Rate of Return
The designated rate of return on the CD is the same, regardless of whether it is in an IRA. The difference is in the benefit of tax-deferral, where the IRA will have a greater advantage in the rate of return.
