Investing in an IRA vs. CD vs. Money Market Account

When comparing options like individual retirement accounts (IRAs), certificates of deposit (CDs) and money market accounts, it’s important to understand how each can fit into your financial strategy. While you can’t directly invest in an IRA itself, you can hold investments like CDs or money market accounts within one. Here’s a breakdown of what each option offers and how they differ.

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What Is an IRA?

An IRA is a tax-advantaged account designed to help individuals save for retirement. IRAs allow you to hold various investments such as stocks, bonds, mutual funds, CDs and money market accounts. There are several types of IRAs, including traditional and Roth IRAs.

With a traditional IRA, contributions may be tax-deductible, and income tax is deferred until withdrawals are made during retirement. Roth IRA contributions, on the other hand, are made with after-tax dollars, so qualified withdrawals will be tax-free. An IRA is designed for long-term retirement savings, offering tax advantages to help your money grow.

Contribution Limits and Eligibility

For 2025, the IRA contribution limit is $7,000 for people under 50 and $8,000 for people age 50 and older. These limits apply across all IRAs. If you have both a traditional and Roth IRA, your total combined contributions cannot exceed this limit. Roth IRA contribution rules are subject to income phase-out ranges beginning at $150,000 for single filers and $236,000 for married couples who file their taxes jointly.

Tax Considerations and Withdrawals

IRAs offer tax advantages that can significantly impact retirement savings. With a Traditional IRA, taxes are deferred until funds are withdrawn, typically after age 59½, to avoid penalties. Roth IRAs, on the other hand, allow for tax-free withdrawals under the right conditions.

It’s also worth noting that required minimum distributions (RMDs) apply to traditional IRAs starting at age 73 (age 75 for people born in 1960 or later). If you own a Roth IRA, however, you will not have RMDs during your lifetime.

What Is a CD?

A CD is a time deposit account offered by banks and credit unions that pays interest on funds held for a fixed term. When you invest in a CD, you leave your money in the account for a set period, which could be months or years, in exchange for earning interest.

Interest Rates and Penalties

CDs generally provide a higher interest rate than standard savings accounts, delivering a low-risk return since the rate remains fixed for the entire term. This feature can be particularly appealing in a declining interest rate environment.

Taking funds out from a CD before the maturity date will usually incur a penalty. This can reduce the overall earnings. As a result, CDs are best suited for individuals who don’t need immediate access to funds.

What Is a Money Market Account?

A financial advisor explaining how CD and money market account investments work inside and outside of an IRA.

A money market account is a type of savings account that can generally pay out more interest compared to regular savings accounts. These are offered by banks and credit unions, and are insured by the FDIC or NCUA, providing a safe place to store your money.

Money market accounts often come with check-writing privileges and debit card access, making them more flexible than CDs, which usually require you to lock in your funds for a set period.

You should note that this type of savings account is often confused with a money market fund. A money market fund is an investment product that invests in low-risk securities and is not FDIC-insured.

Interest Rates and Access

The interest rates on money market accounts can vary based on the financial institution and the current market conditions. While they generally offer better rates than standard savings accounts, they may not always match the potential returns of other investment vehicles like CDs.

However, the liquidity of money market accounts is a significant advantage, as you can typically withdraw funds up to six or fewer times per month without penalties, unlike CDs, which may charge fees for early withdrawals.

IRA vs. CD vs. Money Market Account

Now that we’ve defined each option, let’s compare holding investments like CDs and money market accounts inside an IRA versus using these products separately.

Tax Advantages vs. Flexibility

IRAs, whether traditional or Roth, offer specific tax benefits that neither CDs nor money market accounts provide, but include penalties for early withdrawal before retirement age. CDs and money market accounts outside of an IRA, on the other hand, allow easier access to funds but with no tax advantages.

Growth Potential vs. Stability

IRAs provide access to a broad range of investment options, including CDs, money market accounts, stocks, bonds and mutual funds, which can offer higher growth potential over time.

CDs and money market accounts, whether inside or outside an IRA, are more stable but offer limited growth potential when compared with higher-risk investments held within an IRA.

CDs are locked in at a fixed interest rate, providing earnings in exchange for stability. Money market accounts sit somewhere in the middle, offering a modest return with more flexibility.

Liquidity and Accessibility

Money market accounts allow for frequent withdrawals, though they may be subject to limits. CDs require you to lock your money away for a set period, with penalties for early withdrawal.

Investments held in an IRA, including CDs and money market accounts, are generally less accessible due to early withdrawal penalties before retirement age.

So, if you need immediate access to funds, money market accounts provide the most flexibility, while IRAs are more suited for long-term growth goals.

Bottom Line

A couple updating documents with a financial advisor for their financial plan.

When comparing IRAs, CDs and money market accounts, it’s important to consider tax benefits, liquidity and returns. Inside an IRA, both CDs and money market accounts gain the tax advantages of the IRA, but withdrawals before retirement may incur penalties. Outside an IRA, CDs offer secure, low-risk returns with fixed interest, but early withdrawals may still face penalties. Money market accounts outside an IRA provide more liquidity and easier access to funds, while inside an IRA, they offer the same tax benefits but are subject to IRA withdrawal rules. Your decision depends on your financial goals and your need to access funds.

Tips for Investing

A financial advisor can help you choose investments for your portfolio and make sure you’re on track to meet your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to know what a potential return might look like on a CD, or another investment, SmartAsset’s free investment return and growth calculator can help you get an estimate.