When the stock market makes big swings, it’s normal to think about putting your savings somewhere safer. During these times, low-risk accounts like certificates of deposit (CDs) can look especially appealing, since there’s no chance you’ll lose money when you invest in one.
Does that mean a CD can replace your IRA or other retirement savings accounts? Here’s a breakdown of how a CD compares to an IRA and which one will help you reach your retirement savings target.
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A certificate of deposit (CD) is an account where you agree to deposit your money for a set amount of time, in exchange for a fixed rate of return. With CDs, you can calculate exactly how much interest you’ll earn up front. Plus, you know when you’ll get access to your money again.
Since you agree to leave your money on deposit for several months or years, the bank rewards you by paying higher rates of return on CDs than on checking and savings accounts.
How much higher? The national average interest rate on savings accounts is just 0.41%, but the average on three-month CDs is 1.43%. On top of that, if you shop around, you can find CD rates close to 4.50%.
Read more: The best CD rates on the market right now
An Individual Retirement Account (IRA) is an investment account built to hold your retirement savings. When you contribute money to an IRA, you can usually choose what assets you want to invest in — stocks, bonds, IRA CDs, mutual funds, and more — or you can choose a “target date fund” where your portfolio mix is determined by your retirement timeline.
IRAs are also great investment tools because they have tax benefits. These are the general tax ramifications for each type of IRA:
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Traditional IRA: Your contribution to the account reduces your income tax bill, but you will have to pay taxes on the money you withdraw.
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Roth IRA: Your contribution does not reduce your income tax bill upfront, but you can make tax-free withdrawals.
Unlike 401(k)s, you don’t need an employer to open one of these accounts for you. Instead, you can open an IRA through a bank or investment company. However, you can’t access your money until you reach retirement age in most cases (at least, without paying a penalty), and there are limits on how much you can contribute.
Read more: These are the traditional IRA and Roth IRA limits in 2025
CDs and IRAs don’t have a lot in common. While both can be good places to keep your money, they’re built for different purposes. Each one has different levels of risk and reward.
CDs are built to hold your savings for just a few months or years. They’re generally low risk, since rates are fixed and your deposits are insured. But they’re also low reward, meaning your money can earn more interest elsewhere.
By comparison, your money might sit in an IRA for decades before you retire. Since you have a longer time to invest, you can choose to invest part of your money in higher-risk assets like stocks. If your stocks lose value during a market downturn, you’ll likely have ample time to rebound.
IRAs are one of the most effective ways to save for retirement for a few key reasons:
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Tax penalties for early withdrawals incentivize you to leave money in the account long term.
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IRA returns usually exceed inflation.
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IRAs out-earn most assets over the long term.
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You can adjust your portfolio based on your age and risk tolerance.
For money you don’t need right away — but plan to use for a specific purpose in the next few months or years — time deposit accounts such as CDs and Treasury bills are great choices.
For example, if you have $25,000 saved for a down payment on a home, but you need to continue saving for another six months, you’re better off putting that money into a six-month CD than in an IRA. With the IRA, you could face massive penalties for the early withdrawal.
Here are a few other circumstances when investing in a CD or another asset can be better than contributing to an IRA:
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Age and risk: You’re nearing retirement age, or you’re already in retirement, and you can’t afford to risk losing any money.
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Contribution limits: You’ve already maxed out your retirement contributions for the year, but still want to save more money and earn interest.
Read more: Why a CD should be part of your retirement savings plan