I recently learned that my father has decided to cash out his UPS pension. The immediate question from my dad was, “How do I avoid paying taxes on this thing?”
After running through the various options in my head, I remembered something about my parents' portfolio. My extremely risk-averse parents continue to keep nearly all of their money in a local savings account that earns a robust 0.05% APY. The most reasonable answer was "Dad, roll your pension over to an IRA CD."
IRA CD's are not sexy. In today's interest rate world, a good IRA CD will likely keep you in line with inflation. The best IRA CD's will keep you just above that line. Even inside of a growing economy that sees interest rates rising, the best return an IRA CD is likely to provide you is just 3%.
But for people like my parents (and for me quite honestly), the intrigue of this kind of investment is not the millions I dream of earning. The benefits are in the tax savings, and the guaranteed, 100%, infallible security.
You'll find the best national IRA CD rates below. Two very important things to note before making a decision on opening an IRA CD
- Check your local banks and credit unions. Most will offer junk rates but there are some that can do better than what a bank like Ally can do (for example). My local Citizens Bank is always five to ten basis points higher on CD's than the best rates I can find online.
- All of the below banks are FDIC insured for up to $250,000 per depositor. If you want to open a CD with more than that, consider spreading it around to a few different banks. This insured amount is per person, not per account. Opening multiple accounts with the same bank does not reset the $250,000 FDIC limit.
The Best IRA CD's
Ally Bank: The purple people eaters have done a tremendous job over the last decade re-branding themselves from GMAC Bank. Ally Bank currently offers a full range of IRA CD’s, scaled from three months to five years. Unlike the other banks on our list, Ally offers a tiered interest rate depending on the amount of cash you have available for your IRA.
For example, if you’re looking to open a five year traditional IRA CD, the rate is an OK 2.25% APY. Ally Bank has a variety of CD options including raise your rate CD’s, no penalty CD’s and high yield CD’s but for purposes of your IRA, I would stick with the high-yield variety.
Perhaps the best feature Ally Bank offers for its IRA CD’s is the 10 day best rate guarantee. If you open an IRA CD and the rate goes up inside of the first 10 days, Ally Bank will honor the new rate. This also applies on the date of your CD renewal, so you’re offered a touch of protection should interest rates immediately be on the rise.
- Roth, Traditional and SEP IRA's are available
- No minimum deposit required
Synchrony Bank: Formerly GE Capital Bank, Synchrony Bank is consistently in the top 2 or 3 when it comes to online banking interest rates. For consumers looking to deposit into an IRA CD, Synchrony offers terms of three months to five years. That said, the interest rates Synchrony provides for their, three, six and nine month CD’s is poor compared to others on this list. Rates of 0.75%, 1.00% and 1.25% (respectively) are simply not good, but when you deposit into a 1 year IRA CD, the rate becomes 2.00% and that’s where the value in Synchrony kicks in.
When your IRA CD matures with Synchrony, you are allowed to deposit additional funds inside of the grace period. You can change beneficiaries at any time by completing a simple transfer form on Synchrony’s site, and can also change your IRA from Traditional to Roth or vice versa if you so desire (but with tax implications). The five year IRA CD at Synchrony offers a yield of 3.10%
Synchrony also offers a great high yield savings account with an APY of 1.80% and no minimum balance required.
- Roth and Traditional IRA's are available
- $2,000 minimum deposit required
Discover Bank: Discover is a very well known credit card brand, but they’re also becoming a very trusted online bank. In addition to offering savings and checking accounts, Discover also offers both Roth and Traditional IRA CD’s. What sets Discover apart from others on this list is that they offer both seven year and 10-year IRA CD’s. If you’re OK with locking in your interest rate for a little while longer, Discover can assist. In fact, in 2012, I signed up for a 10-year IRA CD with Discover. So far, the process and statements have been painless.
The slight downside to the Discover IRA CD portfolio is its short term interest rates. Similar to Synchrony, its three month - nine month terms pay very little interest. However, as you work your way up the ladder, the interest rates grow.
Discover is kind enough to offer an IRA CD calculator. It enables you to figure out just how much you can contribute to an IRA each year. It also helps you determine whether or not a Traditional or Roth IRA makes the most sense for you.
- Roth and Traditional IRA's are available
- $2,500 minimum deposit required