What is an IRA savings account, and how is it different from an IRA CD?

By James Viceconte, Head of Investment Product

James joined Citizens Securities Inc. in 2022 and is responsible for the curation and management of the investment product suite of ETFs and Mutual Funds, and portfolio models constructed with these products. As a strategic partner, he has over 30 years of experience in financial markets focused on a broad array of public and private equity and fixed income products.

A 401(k) lets you save for retirement. But what if your job doesn't offer one, or you want to save even more? You might want to consider an IRA savings account or an IRA CD.

An IRA can give your retirement savings a boost. And just like 401(k)s, IRAs have tax advantages. Plus, you can choose where you put your money, such as in stocks or other investments, a CD or a savings account.

Whether you're starting from scratch or building on the savings you already have, you can use IRA savings accounts and IRA CDs to help you meet your goals. Here's what to know about these retirement savings options.

IRA savings accounts have a lot in common with a regular savings account. Your deposits are protected by the FDIC and will earn interest. You can even set up automatic transfers to your IRA savings account from your paycheck.

But there are a few differences between a regular savings account and an IRA savings account. While you can put as much money as you want in a regular savings account, IRA accounts have annual contribution limits. In 2024, the maximum annual contribution to an IRA is $7,000 if you're younger than 50 and $8,000 if you're 50 or older.

Another difference is how they're taxed. Regular savings accounts don't have tax benefits; you pay income tax on the interest earned when you earn it. But traditional IRA savings accounts are tax-deferred until you withdraw money, and Roth IRA savings accounts pay taxes upfront but can have tax-free withdrawals.

Traditional vs. Roth IRA savings accounts

The main difference between the two is how taxes are handled. When you deposit money into a traditional IRA savings account, you can deduct the amount from your taxable income for that year. You then pay tax on the contributions and any earnings when you withdraw money later, ideally after age 59½ to avoid incurring a tax penalty.

With a Roth IRA, you pay tax on the income the year you deposit it into your IRA savings account. Once you reach age 59½ and have owned the account for five years, you can withdraw your contributions and any earnings without paying additional income tax.

Another key difference between traditional and Roth accounts is whether or not you have required minimum distributions. Traditional IRA savings accounts have a provision that you must start taking out a certain amount of money annually by the time you turn 70. This is a way for the IRS to ensure you eventually pay the taxes that have been deferred. Because Roth accounts have already had taxes paid, they don't have required distributions.

When you open a standard CD, you agree to leave the money in your savings account for the term of the CD, which can be anywhere from a few months to several years. In exchange, the bank typically offers a higher interest rate than the rate available on a savings account. Should you need the money before the CD term is up, you pay a penalty, usually a few months' worth of interest.

An IRA CD is similar to a basic CD, but you also get the tax benefits associated with traditional or Roth IRAs, depending on which option you choose. You'll also have to stick to the annual IRA contribution limit.

If you're looking to boost your retirement savings, there are benefits to opening either an IRA savings account or CD if not both.

• Tax advantages. Traditional IRA savings accounts and IRA CDs are tax-deferred, which can help lower your tax bill in your higher-earning years. Roth accounts aren't taxed when you access the money if you've met the age and ownership conditions.
• Lower risk. IRA savings accounts and IRA CDs are FDIC-insured, meaning your money is protected up to $250,000 per person per account type per institution. If, instead, you have stocks or mutual funds in your IRA, you have full market risk and could lose money if the market takes a dip.
• Builds savings habits. With an IRA savings account, you can get in the habit of regularly contributing to your savings account using automatic transfers. With an IRA CD, you can try locking up funds for a period of time in exchange for a higher interest rate.
• Working toward retirement goals. Using a variety of accounts to save for your future is a solid retirement strategy. You may find stability and balance as you build retirement assets with different risk levels.

While both provide a tax-advantaged way to save for the future, a savings account might be the better choice for some and a CD the right choice for another.

When it comes to saving for retirement, you've got choices. An IRA savings account or IRA CD can give your nest egg an extra oomph and security, particularly if you're near retirement and need financial predictability. No matter which option you choose, saving for retirement as early as possible can give your money plenty of time to grow.

Ready to open an IRA and start saving? Request a call from a Citizens Wealth Advisor to help you prepare for the road ahead.

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