IRA Share Certificates vs. CD

For many, an individual retirement account (IRA) is a key element of their retirement savings plan that’s not associated with an employer. The tax-advantaged account conveys major benefits when workers invest their IRA funds in securities like bonds, mutual funds and stocks, or in certificates of deposit (CD.)

An IRA CD is an individual retirement account that holds certificates of deposit issued by a major financial institution like Fidelity Investments or your local bank. An IRA share certificate has many of the characteristics of an IRA CD, except it’s issued by a credit union. The second primary difference is that a CD's investment return takes the form of interest, while a share certificate pays the investor returns in the form of dividends.

Here are some characteristics that an IRA CD and the IRA share certificate have in common.

How Do IRA Certificates Work?

By depositing your cash in either an IRA share certificate or a certificate of deposit, you agree to leave it on deposit for an agreed-to term, which frequently ranges from six months to five years. In exchange, the financial institution pays you a guaranteed rate of interest over the certificate’s term.

The certificate of deposit or the share certificate is simply a type of investment, as are stocks, bonds and mutual funds. You invest your money in the standard IRA CDs and SDs to delay the payment of taxes on your investment gains. This delay maximizes the compounding effect of your investment earnings and grants you a way to lower your tax bill on those earnings by delaying payment until you reach retirement age, when your earnings might place you in a lower tax bracket than your current one.

Advantages of IRA CDs and SCs

IRA share certificates and CDs are but one way to diversify your retirement portfolio with investments that will provide a stable and dependable income stream. Before you include them in your retirement strategy, consider both their pros and cons:

Pros of IRA CD or Share Certificate

An IRA share certificate or CD is a low-risk investment.​ A major advantage of an IRA CD or share certificate is the investment’s low risk. In exchange for committing your cash for the short- or long-term, you earn a guaranteed rate of return on the CD or share certificate. Consequently, these conservative investments are a means to adjust your retirement portfolio mix and its risk level.

Also, if you invest in CDs issued by credit unions or banks backed by a Federal Deposit Insurance Corporation (FDIC,) your deposit is insured up to ​$250,000​ per depositor and account.

IRA CDs and share certificates meet short-term cash needs in a painless way.​ If you have a short-term income need either just before or just after retirement, cash from a short-term IRA certificate of deposit or share certificate can meet that need without imposing an early withdrawal penalty.

CDs and share certificates provide predictable income.​ Short-term IRA certificates of deposit and share certificates provide a predictable income stream for retirees.

Read More​: How to Put Money in a CD

Cons of IRA CD or Share Certificate

IRA CDs and share certificates are relatively low-yield investments.​ Certificates of deposit and share certificate returns are relatively low-yield investments, which may not contribute much to a retiree's efforts to keep up with inflation. As of March 2021, the FDIC says the current national average rate on a 12-month CD is ​0.14 percent​, which is a near-zero return.

IRA CDs and share certificates offer too little return.​ If you’re in your 20s and 30s, your investment time horizon is a long one. Due to their set and relatively low earnings potential, IRA CDs and share certificates may fail to maximize the benefit of that investment time horizon. It might make more sense for these individuals to invest in assets with higher potential yields, such as stocks, bonds, or mutual funds.

A CD or​ ​share certificate​ ​locks you in​. You can’t access the money you invest in IRA CDs or share certificates until the term is up without paying an early withdrawal penalty. Regardless of any change in interest rates during the term of your CD, you’ll remain locked into your initial rate.

If you are approaching retirement age or need to earn immediate income from your retirement savings and you want FDIC-insured safety for a portion of your retirement investments and are willing to accept a low but stable yield, then IRA CDs can be a worthwhile addition to your portfolio. If safety is less of a concern and you'll rely heavily on your IRA investments to meet your retirement goals, it's worthwhile to consider stocks, bonds or mutual funds.