To understand an IRA CD and how it works, it helps to clearly define both and IRA (individual retirement account) and a CD (certificate of deposit).
IRAs are retirement accounts that offer tax advantages and are relatively simple ways to save for your retirement. IRAs can be used to buy investments such as stocks, bonds and mutual funds. The two main types of IRAs are Traditional
, each of which has its own tax breaks.
are savings accounts that have a fixed maturity date, or date you can withdraw the funds in it without penalties, as well as a fixed interest rate. CDs are offered with specific term lengths—or set periods of time—that may be a few months or several years.
An IRA CD allows you to use some of the money you have in your IRA as an investment in a CD. So, in addition to stocks, bonds and mutual funds, a CD is simply another place in which to invest your IRA funds, but it's one with an interest rate that won't fluctuate with the market.