Is an IRA Certificate of Deposit (CD) Tax Deductible?

IRA certificates of deposit can be tax deductible — but only if you meet specific income requirements and don’t have certain workplace benefits.

The good news is that it doesn’t matter what you invest in within your IRA. Whether you choose CDs, stocks, or mutual funds, the same tax deduction rules apply. It’s the IRA account itself that provides the tax benefits, not the specific investment you pick.

Here’s what you need to know about claiming these deductions and whether an IRA CD makes sense for you.

“IRA CDs work well for people who want guaranteed returns, especially if you’re close to retirement. But if you’re young and have decades until retirement, you might be leaving money on the table by playing it too safe. The tax deduction is nice, but it shouldn’t be your only consideration.”

— Hanna Horvath, CFP and Bankrate’s Banking Editor

Are IRA CD contributions tax deductible?

Whether you can deduct your IRA CD contributions depends on how much money you make and whether you have a workplace retirement plan like a 401(k).

If you have a workplace plan, and you’re single, you can fully deduct your IRA contributions if you earn less than $79,000. The deduction gradually disappears as your income rises, and you can’t deduct anything once you hit $89,000.

If you’re married and file jointly, the rules get a bit more complicated. If the spouse making the IRA contribution has a workplace plan, you can deduct contributions with combined income of up to $126,000, with the deduction phasing out until $146,000.

If you don’t have a workplace plan but your spouse does, you can still deduct IRA contributions with much higher income — up to $236,000, with the deduction phasing out at $246,000.

If you’re married but file separately and have a workplace plan, you can only deduct contributions if your income is below $10,000.

Remember, Roth IRAs work differently — you never get a tax deduction for contributions, but your money grows tax-free and you won’t pay taxes when you withdraw it in retirement.

Should you hold CDs in an IRA?

Putting CDs in your IRA can make sense, but it’s not right for everyone. It really depends on your age, risk tolerance and what you’re trying to accomplish with your retirement savings.

CDs give you guaranteed, fixed returns and protect your principal, which can be valuable if you’re worried about market crashes, or you’re getting close to retirement. When you hold them in an IRA, the interest grows without being taxed each year, which helps your money compound faster.

The downside? CDs don’t grow as much compared to other investments. Over the long run, this can really hurt your retirement savings, especially if inflation eats away at your purchasing power.

If you’re in your 20s, 30s, or even 40s, you probably want most of your retirement money in investments that can grow more over time. But if you’re within a few years of retirement, having some money in IRA CDs can provide stability and peace of mind.

The key is not putting all your retirement eggs in the CD basket.

How to pick the best IRA CD

Shopping for an IRA CD is pretty much like shopping for any other CD — you want the best rate for the term that works for your situation.

• Compare rates carefully. Don’t just look at your current bank. Online banks and credit unions often offer much better rates than big traditional banks. Even a small difference in rates can add up to hundreds or thousands of dollars over time.

• Think about timing. If interest rates are rising, shorter-term CDs let you reinvest at higher rates when they mature. If rates are already high and might fall, longer terms can lock in those good rates.

• Make sure your bank is insured. Look for FDIC insurance at banks or NCUA insurance at credit unions. This protects your money up to $250,000.

• Consider your whole financial picture. Don’t choose a bank just because they have great CD rates if you’ll need other services like checking accounts, mortgages or investment help down the road.

Compare today’s best IRA CD rates to find the most competitive options for your retirement timeline.

Understanding the tax rules

The tax benefits of IRA CDs depend on whether you choose a traditional IRA or a Roth IRA. Each has different advantages.

Traditional IRA CDs let you potentially deduct contributions now (if you qualify) and your money grows tax-free until you retire. Then you’ll pay regular income taxes on everything you withdraw. This works well if you think you’ll be in a lower tax bracket when you retire.

Roth IRA CDs don’t give you any tax deduction upfront, but your money grows tax-free and you won’t owe any taxes when you withdraw it in retirement. This can be great if you expect to be in a higher tax bracket later or if tax rates go up.

If you withdraw money from your IRA CD before age 59½, you’ll pay a 10 percent penalty on top of regular income taxes. Plus, you might face early withdrawal penalties from the bank if you break the CD before it matures.

Things to consider before getting an IRA CD

Before you put money into an IRA CD, think about whether it really fits your goals and situation.

What IRA CDs offer

IRA CDs combine the safety of regular CDs with the tax benefits of retirement accounts. You get guaranteed returns that are usually higher than savings accounts, plus your money is protected by federal insurance.

The big advantage is that your interest compounds without being taxed each year, which can help your money grow faster than it would in a regular CD.

Most IRA CDs require at least $500 to $1,000 to get started, and you can choose terms anywhere from six months to five years or more.

What happens when your IRA CD matures

When your CD term ends, you have a few choices that can affect your retirement planning.

You can roll the money into a new CD if you want to keep playing it safe. Or you can move the money to stocks, bonds, or mutual funds if you want more growth potential.

If you’re over 59½, you can withdraw the money, but you’ll pay taxes on it if it’s in a traditional IRA.

Many banks will automatically renew your CD if you don’t give them other instructions, which might not be the best move if rates have changed or your needs have changed.

Is an IRA CD right for you?

IRA CDs make the most sense for certain types of people and situations.

You might like IRA CDs if you’re close to retirement and want some guaranteed income, nervous about market ups and downs, or looking to balance out a portfolio that’s heavy on stocks.

You might want to skip IRA CDs if you’re young with decades until retirement, comfortable with some investment risk for higher returns, or worried about having all your retirement money in low-growth investments.

Remember, you can always put some money in IRA CDs and some in other investments. You don’t have to choose just one approach.

IRA CDs vs. regular CDs

Here’s how IRA CDs stack up against regular CDs:

Regular CDs give you more flexibility if you might need the money before retirement. IRA CDs are better for long-term retirement planning because of the tax benefits.

Pros and cons of IRA CDs

Pros

• You know exactly what you’ll earn, and your principal is protected.
• You may get a tax deduction for contributions, and your money grows without being taxed each year.
• CDs usually pay more than regular savings accounts, so your retirement money grows faster.
• Your money is insured up to $250,000, so you won’t lose it even if the bank fails.
• Once you open the CD, you don’t have to watch the markets or make investment decisions.

Cons

• Over long periods, CDs often can’t keep up with inflation, which means your money loses purchasing power.
• If you need cash before age 59½, you’ll face penalties.
• The stock market has historically averaged much higher than what CDs can earn.
• If you lock in a rate and rates go up, you’re stuck with the lower rate.

Learn more: How to build a retirement portfolio that works for you.

Bottom line

IRA CDs can be tax deductible and provide guaranteed returns, making them useful for certain situations — especially if you’re nearing retirement or want some stability in your portfolio.

But they’re not magic. The tax deduction depends on your income and workplace benefits, and the low returns might not be enough to build the retirement you want if you rely on them too heavily.

Think of IRA CDs as one tool in your retirement toolbox, not the only tool. They work best when combined with other investments that can grow more over time.

Ready to explore your options? Compare today’s best IRA CD rates to see what’s available, or check out high-yield savings accounts if you want more flexibility with your money.