IRA vs. CD - Which one is right for you?
No matter your savings goals, you should consider all the savings products available to find the one that balances security and growth for you.
Whether you're just starting to build up your savings or nearing retirement and looking for a strategy to grow your retirement funds, two common accounts you may come across are IRAs and CDs.
To help you make the right choice for your financial goals and needs, let's review some of the main differences between a Certificate of Deposit and an IRA.
What is an IRA?
An IRA, or individual retirement account, is an investment account. Because of the account's tax advantages and incentives, IRAs are often used as long-term tools to build up retirement savings.
There are two main types of IRAs:
- Traditional IRA: contributions are made with pre-tax dollars & withdrawals are taxed as income
- Roth IRA: contributions are made with after-tax dollars & withdrawals are not taxed
Anyone who earns money or is married to someone earning an income can open an IRA. It is not attached to your employment like other types of retirement accounts.
The IRA account itself is not an investment. You deposit funds into the account; then, you can purchase and hold additional investment securities within the account to grow your money with stocks, bonds, and other investments like IRA CDs.
The IRS imposes several rules and regulations on IRA accounts, including how much you can contribute and when you can withdraw the funds. For instance, the 2023 annual contribution limit is $6,500 annually if you're below 50 and $7,500 for those 50 and older.
What is a Certificate of Deposit (CD)?
A CD is a type of savings instrument that banks, credit unions, and other financial institutions commonly offer. In many cases, CDs receive the FDIC insurance that other bank accounts receive.
CDs operate similarly to savings accounts but with some key differences. For one, CD accounts often have a minimum deposit you must make to open the account. Plus, your funds are locked into the account for a predetermined amount of time unless you want to face penalties–unlike a savings account.
In return, the most significant upside of opening a CD is earning a predictable interest rate on your money. In exchange for leaving your money untouched, you'll see a guaranteed return on your money higher than what you'll find with your savings account.
CD terms can range widely depending on the institution, so it's best to shop around to find the CD that works best with your goals. With most CD terms ranging from a few months to a few years, they make good investments over the short term.
Is an IRA or CD Right for You?
While both products grant you the opportunity to grow your funds, some key differences between the two make one or the other better for you in certain circumstances.
Here are some things to consider to help determine which is right for you:
- What are you saving for? If you have short-term savings goals, like to help pay for your wedding, a CD is likely the better fit. If you are saving for retirement, an IRA can offer better returns over the long run.
- How risk averse are you? CDs offer a guaranteed return and are federally insured, while the funds invested in your IRA are subject to market volatility and other economic factors.
- How much do you want to contribute? The IRS has strict limits on how much you can contribute to an IRA account each year, but contribution limits on CDs can vary widely depending on the issuing institution.
- Are you looking for a tax advantage? IRAs offer tax advantages, but CD accounts do not.
- How much do you earn each year? Certain IRA accounts may have income limits, which CDs don't have.
Open a CD or IRA with Waldo State Bank
Whichever savings product is right for you, at Waldo State Bank (WSB), we're here to help you reach your financial goals.
This year, Waldo State Bank is celebrating 110 years of banking excellence. Since 1913, we have established ourselves as a community-first bank, and supporting those in our area is one of the pillars of being a community bank.
We are running a summer rate special on CDs, and IRA accounts to celebrate this milestone. This means we're offering competitive CD and IRA rates to Sheboygan County residents and beyond.
Click here to learn more about opening a CD or IRA with Waldo State Bank today.
