Best IRA CD Rates?

See how to use a certificate of deposit within your IRA and which financial institutions offer the best IRA CD rates.
By Richard Barrington

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How should you use a certificate of deposit (CD) within an IRA?

There are a few different ways a CD can be useful within an IRA, so you should start by figuring out how you intend to use the CD and then find the best IRA CD rates for your needs.

What are IRA CDs?

IRAs and CDs are really two different things that can be used together.

Individual retirement arrangement

"IRA" stands for "Individual Retirement Arrangement." It is a qualified retirement plan which must be administered by an IRA trustee. Banks and other financial institutions commonly serve as IRA trustees.

As a qualified retirement plan, an IRA is really just a tax structure within which you can use a variety of investments, including CDs. Note that you can have multiple investments within an IRA, including multiple CDs or CDs that roll into new CDs when they mature.

When you open an account with one of these financial institutions, you should be very clear that you intend to set up an IRA and make sure this is reflected on the account paperwork, including the name of the account. That will help to establish the tax status of the account.

The tax status is important because IRAs have certain tax benefits.

In a traditional IRA, your contributions to the account are deductible, and taxes are deferred on any investment earnings in the account. You don't pay taxes until you withdraw money from the account in retirement.

In a Roth IRA, your contributions are not tax-deductible, but investment earnings are not taxed. The big tax benefit really kicks in when you retire, because your withdrawals from the account are not taxable.

How do IRA CD Rates Work?

If you use a CD within an IRA, that CD will earn interest. For the vast majority of CDs, your money is committed for a specified term and the account pays a specific interest rate over the course of that term.

That interest rate should be compared on the basis of annual percentage yield (APY). Banks can have differing policies on how often interest is compounded, which basically means how soon the interest you earn starts earning interest itself. APY measures what the interest rate and the compounding approach of a given product would earn you on an annual basis.

There are two key things to know about CD rates:

  1. The longer the CD term, the higher the rate will typically be.

    So, for example, a 5-year CD will typically earn you a higher APY than a 1-year CD.

  2. Banks can have very different rates for similar products.

    For example, when you compare 5-year CD rates, it's not unusual to see a full percentage point difference in APY between the highest and the lowest rates.

When Should I Get an IRA CD?

As noted earlier, you can have a variety of different investments in an IRA, including CDs. These CDs can be used in your IRA by themselves, along with other CDs, or along with totally different types of investments like stocks or bonds.

To decide whether a CD is a good fit for your IRA, you should think about what you want that portion of your money to accomplish. Here are three examples of roles a CD can play within an IRA:

1. As a stable component of your portfolio

Retirement plans often have lots of long-term investments like stocks. These are expected to earn higher returns over time, but they also represent more risk.

You can water that risk down somewhat by using a CD along with volatile investments like stocks to provide a stable portion of your portfolio. So, while your stocks are going up and down, your CD can be steadily earning interest such that the overall value of your IRA does not fluctuate so wildly.

2. When you are a few years away from retirement

Stability becomes more important as you approach retirement. So, as you get to within five years of retirement age, you might shift more of your money into a five-year CD to provide liquidity once you retire.

3. To manage cash flow in retirement

Even once you retire, you need to manage your investments so that they continue to earn money for you as long as possible but then provide liquidity when you need it.

A CD ladder is a good way to make this happen. A CD ladder is a series of CDs with different maturity dates, so they provide liquidity at different times. For example, you could have a series of CDs with one maturing every year to provide for each year's cash needs in retirement.

What Happens if I Withdraw Early?

A feature of most CDs is an early withdrawal penalty. This is a fee you would have to pay if you took money out of the CD before its maturity date.

For IRA CDs, keep in mind that an even greater factor than the early withdrawal penalty is the tax penalty you would incur if you took money out of the IRA before you reach age 59 1/2.

This tax penalty is 10 percent of the amount you withdraw plus any ordinary taxes owed on that money.

You should always look at the early withdrawal fee before investing in a CD. Still, if the CD is set to mature before you reach retirement age, that fee should not be a big factor in your choice because the tax penalty is so much worse anyway.

Finding the Best IRA CD Rates

There are many banks offering CDs that can serve as an IRA trustee. To pick the right one, decide what role you want the CD to play within your IRA and compare rates to find the best APY for the type of CD you need.

The MoneyRates.com CD page lists hundreds of products you can consider for your IRA. To highlight some of the best choices, the following are profiles of 1-year and 5-year CDs offering the best rates.

As is the case in the examples below, online CDs generally offer the best CD rates. However, MoneyRates also included some branch-based CDs for those who prefer a more traditional approach to banking.

All APYs shown are based on an average of rates offered during the third quarter of 2019.

Best 1-year IRA CD

Bank name: Ally Bank

Avg. APY Q3: 2.47%

Minimum balance: None

Early withdrawal penalty: 60 days' worth of interest on the amount withdrawn

Bank profile: Ally is an online bank based in Sandy, Utah. It was founded in 2004 and had over $117 billion in deposits as of June 30, 2019.


Best branch-based 1-year IRA CD

Bank name: Ridgewood Bank

Avg. APY Q3: 2.10%

Minimum balance: $500

Early withdrawal penalty: 90 days' worth of interest on the amount withdrawn

Bank profile: Ridgewood Bank is headquartered in Ridgewood, New York and has 38 locations, all within the state of New York. It was founded in 1921 and had over $4.4 billion in deposits as of June 30, 2019.


Best 5-year IRA CD

Bank name: Synchrony Bank

Avg. APY Q3: 2.69%

Minimum balance: $2,000

Early withdrawal penalty: 365 days' worth of interest on the amount of principal withdrawn

Bank profile: Synchrony Bank is an online bank based in Draper, Utah. It was founded in 1988 and had over $68 billion in deposits as of June 30, 2019.


Best branch-based 5-year IRA CD

Bank name: Intrust Bank

Avg. APY Q3: 2.57%

Minimum balance: $500

Early withdrawal penalty: 180 days' worth of interest on the amount withdrawn.

Bank profile: Intrust Bank is headquartered in Wichita, Kansas and has 44 locations spread among Kansas, Arkansas and Oklahoma. It was founded in 1876 and had over $4.2 billion in deposits as of June 30, 2019. Intrust Bank offers Time Deposits, which are technically different from CDs but have the same characteristics of a fixed interest rate over a specified period of time and a penalty for early withdrawal.

Frequently Asked Questions

Q. I'm 29 years old with a family, and I own my home. I have a savings account with a good amount of money in it, but the interest is rather negligible. My current job does not offer any type of 401(k) and I was looking for an alternative.

I want a long-term approach that I can contribute to regularly. I considered laddered CDs, but the rates are sub-par and I don't want to worry about paying taxes on the interest. 

A. While average CD rates are admittedly uninspiring, the latest MoneyRates.com America's Best Rates survey shows that the highest CD rates -- which are about twice as high as average rates -- can be found by shopping around. However, the circumstances you describe suggest there may be other decisions to make beyond which certificate of deposit to choose.

Your thought about setting up an IRA makes perfect sense since your employer doesn't offer a retirement plan. Still, that raises the question of whether you should opt for a traditional or a Roth IRA. Once you tackle that matter, you can consider how best to invest your IRA -- and it may well be that a long-term-investment approach is more appropriate for you than a CD ladder even with the best IRA CD rates.

How to decide on a traditional vs. Roth IRA

The decision between a traditional IRA and a Roth IRA centers around how you want to handle the tax liability for your investment. Traditional IRAs allow you to defer taxes on contributions until you start to take money out of the IRA in retirement. With a Roth IRA, you don't get a tax deduction for your contributions -- but then you also don't have to pay taxes on the distributions you take from the plan in retirement.

Essentially, the decision comes down to a question of whether you want to pay taxes now (with a Roth IRA) or later (with a traditional IRA).

One way to think about this is to consider whether you are in a fairly high tax bracket now or whether you expect to be in a higher tax bracket when you retire. You can choose between a Roth and a traditional IRA based on whether you think you are better off paying taxes now or in retirement.

Note that, while an IRA has tax benefits, you shouldn't necessarily put all your savings into one. There is a tax penalty if you take money out before age 59 1/2. So particularly because you are a homeowner, you should hold some savings back in an emergency fund just in case.

Investing your IRA

Since you are 29 and IRAs are designed for you to leave money in them until you reach age 59 1/2, you should think about investing your IRA money for the long term. This may mean thinking beyond the one- to five-year maturity dates you'd typically get from a CD ladder.

Most experts would suggest that investing with a 30-year time frame in mind should involve some component of stock investment. Growth investments like stocks carry the risk of price fluctuations and even permanent losses, but they can also earn returns that help keep your retirement savings ahead of inflation through the years.

If you don't feel ready to select individual stocks, there are plenty of stock mutual funds that can give you broad diversification without having to buy several individual stocks. There are also target-date funds and other multi-asset class funds that handle the asset allocation of your investments for you. (Asset allocation is the decision of how to divide your investments among stocks, bonds and other asset classes.)

Since you are under 30 and already own a home, it sounds like your finances are off to a good start. The next step is to begin saving and investing for the long term via a retirement fund.

People often refer to IRAs and the certificates of deposit (CDs) within them like they are one and the same. While they are often linked, they represent different things.

IRAs

An IRA is a tax arrangement, a retirement account that allows you to defer taxes on contributions (for a traditional IRA) and on investment earnings. The money in this tax arrangement can be invested in a variety of ways, including in savings accounts and CDs, but also in more long-term investments like stocks and bonds.

CDs
A CD is not a tax arrangement but a type of deposit account, usually paying a specified interest rate over a particular length of time.

The point is, an IRA is a tax-advantaged structure for retirement savings. A CD is one of many different kind of investments you can make within that structure.

Thinking about the difference between an IRA and a CD is helpful for understanding that you can have a variety of different investments within an IRA, and you can change those investments while still keeping your money within an IRA.

IRA Rollovers and Withdrawals: What's the Difference?

Besides being able to change the investments within an IRA, you can also move your money from one IRA to another at a different financial institution.

Moving money from one IRA to another is called a rollover. A rollover is different from withdrawing money from an IRA.

With a rollover, you can change accounts without disrupting the tax structure of the IRA as long as you roll into the same kind of IRA.

However, if you take money out of an IRA or transfer it into a non-IRA account, it is considered a withdrawal.

A withdrawal from an IRA is subject to tax regulations:

Taking money out of a traditional IRA before you reach age 59 ½ means you will probably have to pay a 10% penalty on the amount withdrawn, in addition to any ordinary income tax due on that amount.

You can take the amount you contributed to a Roth IRA out of the account at any time without tax penalties, but you will probably be subject to a 10% tax penalty on any investment earnings you withdraw if you are under age 59 ½ and/or the account is less than five years old.

Because of these tax considerations, when you simply want to change IRA accounts you should make it clear that you are rolling from one IRA to another and not simply withdrawing money from the IRA.

CD Rollovers Within an IRA

Besides rolling over from one IRA account to another, there's another type of rollover that can take place within the IRA. That's the rollover of a CD once it matures.

CDs are usually invested for a specified period, and once that term is up the money needs to be taken out, moved to another account or rolled into a new CD.

Many banks will set things up so that maturing CDs are automatically rolled into a new CD of similar length to the maturing CD. While this is a convenience, you may want to make a conscious choice rather than simply letting a CD roll over automatically.

For one thing, you may want to choose a different CD length this time. This decision may be based on when you plan on needing the money or your outlook for interest rates. Those factors are subject to change over time.

Whether your CD rolls over automatically or you choose a different length of CD, rolling over a CD within the same IRA account is fairly straightforward.

However, whenever you have a CD maturing you should view it as an opportunity to earn more interest by finding a better IRA CD rate.

Why You Should Look for Better IRA CD Rates

Rates on CDs vary quite a bit from one bank to another. Your bank may have had the best CD rate when you opened the account, but by the time it matures there may be a better offer out there.

In particular, if you decide to change the length of your CD, you may find that a different bank has the best rate for that type of CD. In other words, the bank with the best 1-year CD rate may not be the same as the bank with the best 5-year CD rate.

In any case, it makes sense to shop around. Since CD rates are typically locked in for the length of the CD, any rate advantage you find could pay off for months or even years to come.

Transferring Your IRA: Avoid Taxes and Penalties

If you find a better IRA CD at another bank, you'll want to transfer your IRA to that bank in a way that avoids taxes and penalties.

The key here is to make sure the CD at the new bank is within an IRA. That way the transfer won't be considered a withdrawal that is potentially subject to taxes and penalties.

The best way to do this is called a trustee-to-trustee transfer. This is where one IRA trustee (in this case, your first bank) transfers the money directly to another IRA trustee (your new bank).

If instead you just get a check from the current bank, that money might be subject to tax withholding because it potentially could be considered a withdrawal. You would then have 60 days to deposit that money in a new IRA to avoid having it considered a withdrawal liable for tax consequences.

Again, a trustee-to-trustee transfer is usually the most efficient way to move your IRA to a new bank. Just be sure to check first on any bank fees associated with a trustee-to-trustee transfer.

Take The Next Steps Towards Earning Better IRA CD Rates

Here are some steps you can take towards earning a better rate on your next IRA CD:

  1. Start thinking about your next move about a month before your CD is scheduled to mature.

    This should give you plenty of time to line up a trustee-to-trustee transfer.

  2. Decide whether you want your next CD to be the same length as the one that is maturing.

    Unless you need the money soon, you may be able to earn a higher rate by shifting to a longer-term CD.

  3. Research IRA CD rates for the type of CD you want.

    Look at the MoneyRates.com CD rates page to see which banks are offering the best CD rates for the type and length of CD that you want.

  4. Check on whether IRA CD rates are any different from regular CD rates.

    Some banks offer different rates on IRA CDs and regular CDs. Also, not all banks that offer CDs also offer IRAs.

  5. Find out if there are any fees associated with making this change.

    This includes IRA trustee fees on the new account and any transfer fees from the old bank.

  6. Get your paperwork set up at the new bank.

    Your choice of new bank is probably very familiar with trustee-to-trustee IRA transfers, so they should be able to walk you through setting things up so the process happens seamlessly.

  7. Notify your old bank in writing that you are doing a trustee-to-trustee transfer.

    This notification should include the delivery instructions to your new bank. It's important to document this so that there is no doubt that this is a rollover and not a taxable withdrawal. Again, your new bank should be able to help with this step.

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