Investing a Solo 401k in a certificate of deposit (CD) combines retirement savings with a conservative banking product. For self-employed individuals, CDs may provide steady earnings and reduced exposure to market swings. By locking in a fixed rate and knowing the maturity date, they can serve as a cautious part of a broader retirement plan.
Before moving forward, it is important to understand how a Solo 401k works under IRS rules, along with the FDIC insurance protections which generally cover up to $250,000 per institution.
The sections ahead explain how to open an account, select the right CD option, and use strategies that could help balance safety with potential growth.
What Is a Solo 401k and Why Use CDs?
Before looking at how to place CDs inside a Solo 401k, it helps to understand both parts: the retirement plan itself and how CDs work. Knowing the trade-offs makes it easier to see whether this conservative option fits your savings goals.
Solo 401k Basics
A Solo 401k, also called a one-participant 401k, is designed for self-employed individuals or business owners with no full-time employees other than a spouse. What makes it unique is that you contribute both as the employee and the employer.
✅ Employee contributions: Up to $23,500 for 2025, plus an additional $7,500 if you are age 50 or older.
✅ Employer contributions: Up to 25% of eligible business earnings, based on how your business income is calculated under IRS rules.
✅ Combined contribution limit: Capped at $70,000 for 2025, or $77,500 if age 50 or older.
Contributions may be made pre-tax (traditional) or after-tax (Roth), giving you flexibility in how taxes apply. As the plan trustee, you control where the account is held and what assets it may include. That range covers mutual funds, ETFs, private funds, real estate, and bank products such as CDs.
📝 Note: Income needed to reach these limits depends on how your business is structured (sole proprietor, partnership, S corp, or C corp). The IRS provides specific rules on net income, adjusted income, and allowable deductions when calculating contributions.
What Is a Certificate of Deposit (CD)?
A certificate of deposit is a savings product offered by banks and credit unions. You agree to keep money on deposit for a set term—often three months to five years—in exchange for a fixed interest rate. The rate is usually higher than a regular savings account, making CDs an option for conservative investors who value predictability.
CDs purchased directly through FDIC-insured banks are typically protected up to $250,000 per depositor, per ownership category, including retirement accounts. Withdrawing funds before maturity usually triggers an early withdrawal penalty, which reduces or cancels the interest earned. Brokered CDs, which you buy through investment platforms, may follow different terms. It is important to confirm how the CD is titled and how FDIC insurance will apply.
Pros and Cons of CDs in Retirement Accounts
Using CDs inside a Solo 401k may help balance stability with conservative growth, but there are trade-offs.
✅ Principal protection: FDIC insurance provides protection against bank failure, which is not the case with market-based investments like stocks or bonds.
✅ Predictable earnings: Fixed rates make CDs useful for covering near-term retirement expenses or balancing a higher-risk portfolio.
✅ Tax deferral: Interest earned inside a Solo 401k generally grows tax-deferred until you take withdrawals.
❌ Lower potential growth: CD rates often lag behind long-term returns from equities or other investments, which may reduce account growth for younger investors.
❌ Inflation and rate risk: If inflation rises above your fixed rate, or if market rates increase after you lock in, purchasing power may decline.
❌ Limited access: Early withdrawal penalties apply even inside a retirement plan, and custodians may add their own restrictions or fees.
❌ Insurance limits: The $250,000 FDIC cap applies across all deposits at the same bank, in the same ownership category. If your Solo 401k balance is large, spreading CDs across multiple institutions may be necessary.
How to Invest a Solo 401k in a CD
Using a certificate of deposit (CD) inside a Solo 401k is possible, but it requires careful setup. Since a Solo 401k is a retirement plan that must follow IRS rules, CDs must be titled in the plan’s name, not your personal name. This ensures that the investment is treated as part of the retirement account and retains its tax-advantaged status.
Once your Solo 401k is open with a provider that allows direct account control, you can use the plan’s funds to buy CDs at banks or through brokerage platforms. The process looks similar to opening a CD personally, but the account ownership details are different.
Steps to Get Started
Step 1: Confirm plan flexibility. Make sure your Solo 401k provider permits CDs as an investment. Not all providers or custodians handle bank products.
Step 2: Set up a plan-owned account. Open a bank or brokerage account in the name of your Solo 401k, not your personal name. This protects tax treatment.
Step 3: Select CD terms. Choose the length (such as 6 months, 1 year, or 5 years) and interest rate that align with your retirement timeline.
Step 4: Fund the CD. Use money from your Solo 401k account. Ensure funds are properly titled and transferred directly from the plan.
Step 5: Track maturity. Note when the CD matures so you can decide whether to reinvest or redirect the funds within the 401k.
Compare IRA CDs vs Bank CDs
When adding CDs to a Solo 401k, investors generally face two options: brokered CDs, which are purchased through brokerage platforms, and direct bank CDs. Both qualify as insured deposits, but they work differently in practice.
| Feature | IRA CD (Brokered or Bank-Labeled) | Direct Bank CD |
| Purchase venue | Bought on brokerage platforms and often labeled for IRA/401k use | Opened directly with a bank, either online or at a branch |
| FDIC insurance | Coverage up to $250,000 per bank, per participant, if titled in the plan’s name | Same $250,000 limit, combined with any other deposits at the same bank |
| Early access | Can be sold on the secondary market (prices may vary) | Redeemable early by paying the bank’s penalty |
| Interest accrual | Starts on the settlement date after issuance | Starts as soon as the deposit is funded |
📝 Note: Brokered CDs may suit those who want potential liquidity through secondary market sales, even with pricing uncertainty. Direct bank CDs may appeal to those who prefer a simple structure and predictable penalties.
Key Factors and Alternatives to CDs
Holding certificates of deposit inside a Solo 401k may feel straightforward, but the rules governing taxes, distributions, and account administration still apply. It’s also important to weigh the broader trade-offs, such as interest-rate conditions, inflation pressure, and insurance protections. Below are the main considerations, along with practical strategies and alternatives.
Taxes, Penalties, and Rules to Know
Solo 401k funds, including those allocated to CDs, remain tax-deferred until withdrawn. However, several IRS rules can affect how and when you access those funds:
- Early-withdrawal penalties: Distributions before age 59½ typically face both ordinary income tax and a 10% additional tax. Only specific IRS exceptions, such as disability or substantially equal periodic payments (SEPP), may reduce this cost.
- Required minimum distributions (RMDs): Starting the year you turn 73, CD balances are counted in your RMD calculation. If a CD matures after your deadline, you may need to liquidate early or sell it on the secondary market to satisfy the RMD amount.
- Annual filings: Once your Solo 401k surpasses $250,000 in total assets, you must file Form 5500-EZ each year. Tracking CD purchase dates, maturity schedules, and valuations helps simplify reporting and compliance.
Interest Rates, FDIC Coverage, and Inflation Risk
Beyond compliance, CDs also come with financial trade-offs inside a retirement account. These factors determine how much protection and income a CD can realistically deliver inside the plan:
- Rate environment: As of mid-2025, CD yields generally move in line with Treasury benchmarks, which remain elevated. Locking in current rates could be attractive if you expect future declines.
- Deposit insurance: CDs held by a Solo 401k trust are insured by the FDIC up to $250,000 per participant, per bank. Larger deposits may exceed coverage and need to be spread out.
- Inflation impact: If consumer prices rise faster than your fixed CD rate, the real value of returns could shrink over time, limiting purchasing power.
Using CD Laddering for Flexibility
A CD ladder is one way to balance yield, access, and insurance coverage. By spreading funds across staggered maturities (e.g., 6, 12, 18, 24 months), you can:
✅ Reduce interest-rate risk: Only a portion of your account resets when rates change, smoothing volatility.
✅ Expand FDIC coverage: Opening CDs at multiple banks lets you stay within the insured limits while diversifying holdings.
✅ Maintain liquidity: Regular maturities free up funds without triggering early-withdrawal penalties, which may help with RMDs or unexpected plan expenses.
Other Low-Risk Options to Consider
CDs are not the only conservative option available inside a Solo 401k. Other vehicles may play a similar role while offering different trade-offs:
| Option | Why It’s Similar | Key Differences |
| Treasury Bills (T-Bills) | Fixed maturity, backed by the U.S. Treasury | Tradeable before maturity; exempt from state income tax |
| Series I Savings Bonds | Principal protection, with an inflation-adjusted rate | $10,000 annual purchase limit; 12-month holding period |
| Money-Market Mutual Funds | Invest in short-term government and corporate debt | Not FDIC-insured; yields move with short-term rates |
📝 Note: Holding a mix of these instruments alongside CDs can help spread rate exposure while still prioritizing stability. Before reallocating, evaluate liquidity, insurance, and fee structures, and keep in mind that all Solo 401k distributions follow the same IRS tax and penalty rules noted earlier.
Wrapping Up: Should You Use CDs in a Solo 401k?
CDs can play a conservative role in a Solo 401k by offering fixed returns and FDIC protection. They may help provide stability, especially if you want predictable income or are near retirement. The trade-off is that CDs typically deliver lower long-term growth compared with other investments and may lose ground against inflation.
Before moving forward, check that your Solo 401k custodian allows CDs and review whether strategies like laddering or no-penalty CDs fit your goals. Align your choices with your overall retirement plan, time horizon, and liquidity needs.
Used thoughtfully, CDs can serve as a stable anchor within a diversified Solo 401k.
📌 Need more insights on retirement investing? Explore these articles on Solo 401k strategies and plan compliance.
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