Investing in an IRA CD vs. a Money Market Account

A senior reviewing a financial plan that includes both an IRA CD and a money market account.

Choosing between an IRA CD or a money market account depends on your financial goals, liquidity needs, and risk tolerance. Both options can provide market interest earnings and offer advantages over traditional savings accounts. IRA CDs lend themselves to long-term growth with tax advantages, while money market accounts offer greater flexibility, liquidity, and the potential for higher returns. Consulting a financial advisor can help you determine which option fits your portfolio.

What is an IRA CD?

An Individual Retirement Account Certificate of Deposit (IRA CD) combines the tax benefits of an IRA with the security of a CD. Unlike traditional savings accounts that pay interest rates that vary over time, IRA CDs offer predictable returns on your investment. This makes them an attractive choice for conservative, stability-seeking retirement savers.

IRA CDs work similarly to regular CDs, but are held within an IRA, which provides tax benefits. When you invest in an IRA CD, you agree to deposit a specific amount of money for a specific period of time, ranging from a few months to a few years. In return, the bank or credit union pays a fixed interest rate. The interest you earn is either deferred or tax-free, depending on whether you choose a traditional IRA or Roth account. This tax treatment can significantly increase your savings over time, especially if you start investing earlier.

Security is the main attraction of an IRA CD. CDs are typically insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000. This makes IRA CDs a low-risk option that may appeal to people who are close to retirement and want to preserve capital. Additionally, a fixed interest rate provides a reliable source of income that can help investors cope with volatile market conditions. For people who prefer a hands-off approach to investing, IRA CDs require minimal management, allowing you to focus on other aspects of your financial plan.

What is a money market account?

Woman looking for key differences between IRA CDs and money market accounts.

A money market account is a type of savings account that typically offers higher interest rates than a standard savings account. These accounts are offered by banks and credit unions and are designed to provide a safe place for your money while allowing you to earn competitive returns. Unlike regular savings accounts, money market accounts often offer check-writing privileges and debit card access, making them a more flexible option for those who want to maintain liquidity while earning interest.

Money market accounts typically offer higher interest rates than traditional savings accounts. This may make it a way to increase the returns on savings without taking on the risks associated with investing in stocks or bonds. Like CDs, money market accounts are FDIC or NCUA insured, giving you peace of mind that your funds are protected up to the insured limit.

Money market accounts provide more flexibility and liquidity than CDs, but they still often come with certain requirements and restrictions. Many financial institutions require a higher minimum balance to open and maintain a money market account compared to a regular savings account. Failure to meet this minimum balance may result in fees or reduced interest rates. Additionally, federal regulations limit the number of certain types of withdrawals and transfers from money market accounts to six per month. This is worth considering if you need frequent access to your funds.

Key Differences in Investing: IRA CDs vs. Money Market Accounts

Both of these options offer unique benefits and limitations, taking into account different financial goals and risk tolerance. Here’s a breakdown of the four main differences between an IRA CD and a money market account to help you decide which one will best suit your investing strategy.

Interest rates and returns: IRA CDs typically offer a fixed interest rate, providing predictable returns over the life of the CD. Money market accounts often have variable interest rates, which can change depending on market conditions.
Liquidity and access to funds: Money market accounts typically offer greater liquidity, allowing you to more easily access funds via checks or debit cards. IRA CDs require you to lock up your funds for a set period of time, and early withdrawals may incur penalties.
Risk and safety: Both IRAs and money market accounts are considered low-risk investments, but they differ in terms of safety. IRA CDs are FDIC insured up to applicable limits, providing a high level of security for your investment. Money market accounts are also typically insured, but their returns may be more susceptible to market volatility.
Tax consequences: Investing in an IRA CD may offer tax benefits such as tax-deferred growth, which can be beneficial for retirement savings. Money market accounts do not offer the same tax benefits, and the interest earned is typically taxed in the year it is received.

Bottom line

When deciding between an IRA CD and a money market account, consider your financial goals and risk tolerance. If stability and predictability are a priority, you may prefer a fixed-rate IRA CD. If you need access to your funds, a money market account gives you more flexibility while still offering competitive interest rates.

Financial planning tips

A financial advisor can help you create a retirement plan based on your needs, goals and risk profile. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can also have a free introductory conversation with your advisor to decide which one you think is right for you. If you want to find an advisor who can help you achieve your financial goals, start now.
Use SmartAsset’s savings calculator to find out how much you’ll have in your savings account in the future after interest and additional contributions.

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