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Can you buy CDs or share certificates in an IRA?

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Individual retirement accounts are powerful tools for securing your retirement nest egg. 
Younger investors with plenty of risk tolerance prefer to own stocks in their IRAs. Still, as savers get closer to retirement, the low-risk security of share certificates and certificates of deposit (CD) may look like a better bet.
Here’s the good news: You can buy CDs in an IRA – and it’s easy. Best of all, you could also benefit from the substantial tax advantages of an IRAFor specific tax advice, please consult a qualified tax professional. First Tech does not sell Certificates of Deposit (CDs) in or outside of Individual Retirement Accounts. Membership required and subject to approval.. Let’s take a closer look at how that works.

How do IRAs work?

IRAs are tax-advantaged investment accounts designed to help you save for retirement. When you save money on an IRA, you can reduce your income taxes, shelter your investments from capital gains taxes, and help yourself build a secure retirement.
There are various types of IRAs, including traditional and Roth accounts, Simplified Employee Pension IRAs and SIMPLE IRAs for entrepreneurs, and even spousal IRAs for non-working spouses. Each has different eligibility criteria and special rules.
Different IRAs offer different kinds of tax benefits. Traditional IRAs provide tax-deferred growth—you make contributions with pre-tax dollars, reducing your taxable income today. Your withdrawals during retirement get taxed at your regular income tax rate. 
Roth IRAs offer tax-free growth. You make contributions with after-tax dollars, but qualified withdrawals in retirement are entirely tax-free.
Whatever the type, all IRAs share common annual contribution limits that determine how much you can contribute each year. In 2023, the annual limit is $6,500 for individuals under 50, with an additional catch-up contribution of $1,000 allowed for those aged 50 and older.

What are CDs and share certificates?

A certificate of deposit is a fixed-term account that banks offer. This low-risk investment pays a fixed interest rate over a set period, ranging from a few months to several years.
A share certificate is a fixed-term account offered by credit unions. This low-risk investment pays a fixed dividend over a set period, ranging from a few months to several years. 
When you invest in a certificate, you agree to leave your money in the financial institution for the agreed-upon term. In return, you receive a fixed annual dividend or interest rate. But if you take money out of these certificates before maturity, you may face an early withdrawal penalty, which can eat into your earnings. Make sure you understand the terms and conditions as they can vary based on the financial institution’s policies. Certificates are popular among investors who prioritize capital preservation and a guaranteed return on investment.

Can I buy CDs in my IRA? What about share certificates?

Yes, you can buy CDs in your IRA through a bank. You can also buy share certificates in your IRA through a credit union. Owning a certificate in an IRA is a good option for risk-averse investors looking to preserve capital and earn a steady return.
When your IRA invests in certificates, the interest or dividends you earn grow tax-deferred in a traditional IRA or tax-free in a Roth IRA. This tax advantage helps you maximize the growth potential of your retirement dollars and build a bigger nest egg.
Another benefit of buying CDs or share certificates in an IRA is the security and stability they provide for your overall retirement portfolio. Unlike riskier investments like stocks or mutual funds, the National Credit Union Administration insurance fund covers share certificates at most credit unions for up to $250,000 per account per depositor.
NCUA insurance of your principal plus a guaranteed dividend rate means you get reliable and predictable income for retirement. Just be mindful that the fixed rate may not keep pace with inflation, which could impact your purchasing power over time. 

The pros and cons of owning certificates in your IRA

There are advantages and disadvantages to investing in CDs and share certificates in your IRA.

Pros of owning certificates in your IRA

  • Fixed certificate rates offer guaranteed returns. Unlike investments like stocks and funds, which are subject to the uncertainties of the stock market, share certificates offer guaranteed returns over a fixed term. This means you know exactly how much in dividends or interest you will earn during the investment’s duration. This predictability is beneficial for retirement planning, as it allows you to estimate the growth of your retirement funds with certainty.
  • Tax advantages. Earned dividends grow tax-deferred when you own certificates in a traditional IRA. That means you only pay income taxes once you withdraw the funds in retirement, potentially allowing your money to grow for a longer time. In a Roth IRA, qualified withdrawals of earnings are tax-free.
  • Safety and stability. Certificates are low-risk investments insured by the NCUA up to $250,000 per account. This ensures a high level of safety for your retirement funds.
  • Added diversification. Adding certificates to your retirement portfolio offers additional diversification. Diversifying your investments across different asset classes helps reduce overall portfolio risk while maintaining a steady income.
  • Flexibility. Certificates are available with shorter and longer terms, from a few months to ten years or more. This flexibility lets you align your investments with your financial goals and time horizon. You can ladder your certificate investments, purchasing multiple certificates with varying maturities to provide regular access to funds without sacrificing earnings.
  • Easy to open, no fees. Opening an IRA for your certificates is easy, especially if you already have an existing account. You also won’t have ongoing fees or maintenance costs associated with these types of investments.

Cons of owning certificates in your IRA

  • Inflation risk. One potential downside of certificates is that their interest or dividend rates may not always keep up with inflation. As the cost of living rises, the purchasing power of the return earned on certificates could diminish, potentially eroding the value of your savings.
  • Low liquidity. The fixed terms of certificates restrict the liquidity of your retirement savings since you lock your money into these investments for a fixed time. Lack of liquidity can be a significant drawback in emergencies or when you need access to your funds for unexpected expenses.
  • Opportunity cost. Opting to put your money into certificates means missing out on potentially greater returns from riskier assets like stocks. While certificates offer safety, they may not generate the same long-term returns as a diversified portfolio with exposure to higher-yielding assets. This argues against investing your entire retirement portfolio in these vehicles.
  • Potential tax pitfalls. While traditional IRAs offer tax-deferred growth, you’ll need to pay tax on your withdrawals in retirement. This could result in higher tax liabilities, especially if you are in a higher tax bracket. Investments like certificates in a Roth IRA grow tax-free, but you need to ensure you meet the requirements for tax-free withdrawals to benefit from this advantage fully.

The Bottom Line

Diversification is the key to investing—especially for retirement—and buying CDs in your IRA from a bank or share certificates from a credit union can be a sound source of diversification. Including them with other assets like stocks, bonds and funds provides stability during market downturns while also allowing optimization for growth.
As with any investment decision, it’s essential to carefully assess the terms, interest or dividend rates, and penalties associated with certificates to ensure they align with your long-term investing strategy. Consulting with a financial advisor can help you develop a comprehensive retirement strategy that aligns with your financial needs and goals.
Curious about how certificates can help protect your retirement savings? First Tech has IRA share certificates with competitive dividend rates. See how easy it is to become a member and earn a guaranteed rate of return on your retirement savings.