An IRA CD is a conservative investment account for people nearing retirement

• An IRA certificate of deposit is a type of retirement investment account.
• Traditional, Roth, and SEP IRA CDs follow the same guidelines and restrictions as any other IRA.
• IRA CDs could be a worthwhile option if you're nearing retirement and looking for a safe investment.

You're probably familiar with an individual retirement account (IRA), a tax-advantaged investment account that helps you save for retirement. You also may have heard of a certificate of deposit (CD), a savings account that locks in your Annual Percentage Yield (APY) for a set amount of time.

But what's an IRA CD? It's a type of account that combines these two concepts.

What is an IRA CD?

An IRA CD locks in your APY for a set amount of time and saves your money specifically for retirement. It can be an option worth considering for people who are getting close to retirement and are looking for a safe way to invest their money.

How an IRA CD works

An IRA CD is a type of retirement account that invests your funds in a certificate of deposit (CD). When you open a regular CD, you're putting away money for the near future — with an IRA CD, your CD is part of your long-term retirement savings strategy.

Most banks allow you to choose between a Traditional and Roth IRA CD, and some offer SEP IRAs for people who are self-employed. An IRA CD follows most of the same rules as any other IRA. You're limited to a certain amount in contributions per year, and you'll pay the usual taxes and penalties for early withdrawals that you would with any other Traditional, Roth, or SEP IRA.

This means you'll contribute after-tax dollars to a Roth IRA CD, and you won't pay taxes when you withdraw money. For a Traditional IRA CD and SEP IRA CD, you'll typically contribute money before taxes are taken out, then pay income tax on withdrawals.

Where can you open an IRA CD?

Don't assume that just because a bank offers a CD, it also has IRA CDs — it isn't all that common. Of the banks that do offer IRA CDs, the best rates are currently at Ally Bank, Discover Bank, Synchrony Bank, and Alliant Credit Union.

These banks offer competitive rates and a variety of term lengths, and they don't charge monthly maintenance fees. Your choice may come down to what term length you want, how much you have for an opening deposit, or whether you want a SEP IRA.

Should you get an IRA CD?

Here are some of the advantages and disadvantages to consider when getting an IRA CD:

Pros of opening an IRA CD

• It's a good option if you are looking for a safe investment strategy.
• It may appeal to you if you're only a few years from retirement.
• You'll have the guaranteed rate of return that comes with CDs and the tax benefits that come with IRAs.
• You don't have to pay brokerage fees.

Cons of opening an IRA CD

• It's not a good match for anyone wanting to take risks with investments.
• If you're young, you probably have time to take riskier investments that will earn you more in the long run.
• You're limited to how much you can contribute to an IRA annually.
• You could end up paying considerable early withdrawal penalties. You'll pay the bank's early withdrawal penalties if you take out funds before the CD matures. You'll pay the usual 10% fee if you withdraw from an IRA before age 59 1/2. And if you withdraw before the IRA CD matures and before you turn 59 1/2, you'll pay both penalties.

Generally, your retirement savings strategy should change as you approach retirement. If you have a significant number of years left to invest, you'll likely want to take on more investing risk than an IRA CD can provide. If you're retiring in the next few years, however, an IRA CD can be a less risky option for investing with a guaranteed rate of return.