Difference Between IRAs and CDs
The main difference between an IRA and a CD is the account type. An IRA is an investment account, while a CD is a savings account.
An IRA, known as an individual retirement account, is used for long-term investment of retirement savings.
On the other hand, the CD, short for a certificate of deposit, is used for a short-term savings account.
Account Type
The IRA is a retirement account that provides tax advantages and can carry a variety of investments such as CDs, bonds, stocks, and more.
In contrast, a CD is a type of savings account that allows you to deposit a fixed total of money for a fixed term to obtain interest.
How It Works
An IRA acts as a basket that carries your investments but can't hold life insurance or collectibles. 
When you start to have withdrawals from your IRA, you will let your investments grow until you retire.
A CD allows you to obtain interest by leaving your deposit in the account for a given period, called a term.
You will get your deposit back and the interest your money earned when the account reaches the end of the term or even matures.
Terms
An IRA will let you wait until you turn 59 1/2 to withdraw money since it is designed as a savings account for retirement.
However, funds can be withdrawn before that age, but you are subject to tax and may pay a penalty fee of 10%.
The terms of CDs usually range from a month to five years. Basically, you can't access your money until the end of the term.
Types
IRAs and CDs have different types. The primary types of IRA include Traditional IRA, Roth IRA, SEP IRA, Payroll deduction IRA, SIMPLE IRA, and Self-directed IRA.
Similar to IRAs, CDs also have their primary types, namely Traditional CDs, High-yield CDs, Market-linked CDs, Jumbo CDs, Liquid CDs, Brokered CDs, and Add-on CDs.
Early Withdrawal Penalties
Early withdrawal penalties are applied to both IRAs and CDs.
You will often be charged a 10% penalty and need to include the distribution in your gross income if you withdraw any amount from an IRA before you reach 59 1/2 years old.
On the other hand, you will be subject to an early withdrawal penalty in Cds if you withdraw money from the account before the maturity date.
Minimum Deposits
Minimum deposit requirements may be present in IRAs and CDs, depending on your chosen financial institution.
Maximum Deposits
The IRS limits the deposits for IRAs each year.
In 2022, if you are below 50 years old, you cannot contribute more than $6,000, and more than $7,000 if you are 50 or above. In 2023, you can contribute $6,500 if you are below 50 or $7,500 if you are 50 or above.
Federal Insurance Coverage
The Federal Deposit Insurance Corporation (FDIC) or National Credit Union Association (NCUA) insured accounts held in IRAs and in CDs for up to $250,000 per depositor.
IRAs and CDs are counted toward separate $250,000 totals. However, any deposits over $250,000 for each one wouldn't be insured.
Tax Benefits
IRAs provide tax advantages but differ based on the type of IRA you have chosen, while CDs don't have any unique tax benefits.
Thus, any interest you obtain counts as taxable income in the year you receive it.
Income Limits
With IRAs, your contribution limit can be affected by your income and filing status, while issuers of CDs typically don't have any income limits for depositors.
Which is Better?
The answer to which account is better depends on your circumstances and goals.
A CD may be the best choice if you're looking for immediate income and stability.
If you prefer the potential for tax-deferred growth, an IRA could make more sense.
An IRA lets you save over the years while earning more interest than you can get from CDs.
You can begin to make withdrawals without any penalties once you reach the age of 59 1/2.
Bottom Line
When deciding whether an IRA or a CD is better for you, you must consider your goals and how much risk you are eager to take.
CDs offer stability and immediate income but have fewer tax benefits than IRAs.
IRAs provide the potential for tax-deferred growth but may be subject to early withdrawal penalties.
FAQs
1. What is the distinction between an IRA and a CD?
The primary difference between an IRA and a CD is that an IRA is an account used for retirement savings, while a CD is a short-term investment.
2. What is an IRA?
An IRA is an account used for retirement savings. The three primary types of IRA are Traditional IRA, Roth IRA, and SEP IRA.
3. What is a CD?
A CD is a short-term investment. The primary types of CDs are Traditional CDs, High-yield CDs, Market-linked CDs, Jumbo CDs, Liquid CDs, Brokered CDs, and Add-on CDs.
4. Which is better, an IRA or a CD?
The answer to which account is better depends on your circumstances and goals.
5. What are the benefits of an IRA?
The benefits of an IRA include the potential for tax-deferred growth and more flexibility with your money compared to a CD.
