Should You Use CDs for Retirement Planning?

Quick Answer

CDs can be a good retirement planning add-on—not the centerpiece of your strategy. While they can help boost your savings, returns are usually lower when compared to stock investing.

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Certificates of deposit (CDs) can help grow your savings in the short term, especially when interest rates are high. Funds are generally locked into the account for the duration of the CD term. When it ends, you'll get back your initial investment, plus interest. CDs can be a helpful addition to your retirement planning strategy, but they shouldn't be your primary saving tool. Here's when they may be beneficial, along with other retirement saving options to consider.

Pros and Cons of Using CDs for Retirement


  • CDs are considered low-risk investments. You'll know what your returns will be from the outset, assuming you don't pull your money out before the term ends. Early withdrawals typically result in a penalty.
  • Returns usually outpace savings accounts. The interest rates on savings accounts, CDs and money market accounts generally follow the federal funds rate. When this rate goes up, annual percentage yields (APYs) usually do too. CDs tend to offer higher yields than other deposit accounts. As of November 2023, some CD yields are up to 6.5%.
  • They offer another way to save. This can be appealing if you've hit your annual contribution limit on other retirement accounts. CDs can allow you to continue saving and earn decent yields.
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  • Returns are lower than higher-risk investments. Over the past century, the stock market has had average annual returns of around 10%. Stock investing is generally used to fuel long-term growth, but it comes with more risk than CDs. Returns aren't guaranteed—and you can expect bouts of market volatility along the way.
  • They're not ideal if retirement is years away. If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.
  • Early withdrawal penalties can minimize returns. Taking money out of a CD early can result in hefty fees. The penalty depends on the account terms but could equal more than a year's worth of interest.

When CDs May Be a Good Addition to Your Retirement Portfolio

In the following scenarios, CDs may be a solid addition to your retirement strategy.

You're Getting Closer to Retirement

If retirement is only a few years away, CDs could provide a safe way to make extra money on your savings—assuming you have other income sources in the mix. Let's say you're planning to retire in three years. Interest rates are up and you find a five-year CD with a competitive APY. You could put a portion of your nest egg into the account and let it grow.

When you retire, you can draw on other sources of income until your CD expires. That may be Social Security benefits, taxable distributions from a 401(k) or traditional IRA or tax-free withdrawals from a Roth IRA. CDs can be another vehicle you use to grow your savings, even in retirement. Their low-risk nature can also provide diversification and help balance out high-risk investments in your portfolio.

You've Maxed Out Your Retirement Account Contributions

Tax-deferred retirement accounts like 401(k)s, traditional IRAs and health savings accounts (HSAs) have annual contribution limits. Contributions also reduce your taxable income. If you've maxed out your contributions but want to continue saving, CDs might be a good option—especially since you've already gotten the maximum tax benefit on those retirement accounts.

Other Ways to Save for Retirement

  • 401(k): These employer-sponsored retirement accounts offer multiple tax benefits. The money you put into a 401(k) will reduce your taxable income while you're working. You might also be eligible for an employer match. You'll owe taxes when you withdraw funds in retirement.
  • IRA: If you don't have access to a 401(k), a traditional IRA offers similar tax benefits. A Roth IRA works a little differently and is funded with after-tax dollars. That means you won't be taxed on withdrawals you take in retirement.
  • HSA: Contributions to an HSA are tax-deductible. Your earnings will also grow tax-free, and you won't be taxed on withdrawals that are used for qualified medical expenses. Another perk is that once you turn 65, you can use HSA funds for whatever you like; however, you'll still be taxed on non-qualified distributions. HSAs are available to those enrolled in high-deductible health plans.
  • Brokerage account: You can use a brokerage account to buy stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investments. You won't get the tax advantages of a 401(k) or IRA, but a brokerage account can make sense if you've already maxed out those accounts. Unlike CDs, cash in a brokerage account can be withdrawn without penalty.
  • Annuity: You can purchase annuities from insurance companies and some banks, mutual fund companies and brokerage firms. In exchange, you may receive guaranteed income payments in retirement. Fees might eat into these benefits, depending on how the annuity is structured.

The Bottom Line

CDs may or may not fit into your retirement planning strategy. They're worth considering if you've maxed out your retirement accounts or are close to retirement. CDs are considered safe investments, though long-term returns are usually lower than investments that carry more risk. Early withdrawal penalties also typically apply.

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