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If you’re looking for a place to park your savings, IRAs and CDs typically get a better return than traditional savings accounts. But which should you choose, IRA or CD?
Everyone should have at least one retirement account. If you do not, you probably want to open one instead of getting CDs. CDs are a low-risk investment, but it’s unlikely that they’ll help you accrue the money you need for a financially healthy retirement. IRAs and other retirement vehicles can. If your employer doesn’t offer a 401(k), or you’re self-employed or otherwise employed, consider opening an online IRA to get started.
Assuming that you already have a retirement account, what are your goals and preferences? For example, some people may want:
CDs, or Certificates of Deposit, can be a great way to accumulate some savings over a period of time such as six months or five years. They work slowly and steadily, and they carry virtually no risk.
On the other hand, if the inflation rate is high, you could “lose” money on CDs, for example, if your CD rate is 2 percent and the inflation rate is 2.2 percent. When possible, avoid investing in CDs offering rates lower than the inflation rate.
IRAs are riskier than CDs, but in the long term, the odds are that you’ll end up with significantly more money through an IRA than with a CD. You can also invest in CDs through your IRA (you can also invest in other things such as stocks and bonds, mutual funds, and so on). So, it’s possible to invest in both an IRA and a CD at the same time.
IRAs may not give you peace of mind, especially if the economy tanks and you lose thousands of dollars. Economies do tend to recover, but the recovery can take years. Likewise, the money in your IRA can take years to get back to where it was. If you plan for IRA withdrawals to occur during this time, that could be a huge issue.
Ultimately, the question of which is better, an IRA or CD, comes down to your risk tolerance and your needs. If you want peace of mind at virtually any cost, you may want to go for CDs — but only if you have a retirement account set up already. Alternatively, you could open an IRA in which CDs play a part.
You can also try investing in CDs for a few months or years and work your way up to IRAs. There are numerous options; the most important part is researching what you want your money to achieve, and in what timeframe.