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Can I transfer my IRA to CDs without penalty?

October 18, 2013

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Roth IRA

Q: I'm thinking of moving money from an IRA savings account to CDs at another financial institution. I'm 60 years old -- will I be penalized for making this change?

A: Being 60 years old means you are no longer subject to the tax penalty on early IRA distributions. However, there is still a question of why you would want to give up the other tax advantages of having an IRA, especially since you should be able to make this kind of switch without giving up those advantages.

The IRS imposes a 10 percent tax penalty on distributions from an IRA if the owner of that IRA is younger than 59 1/2, so you are in the clear on that score. Remember though, as money comes out of an IRA, you are subject to ordinary taxes due on that money. In the case of a traditional IRA, the entire amount you withdraw is taxed as income, unless some of the contributions to that IRA were made with after-tax money. In the case of a Roth IRA, the amount of your contributions should not be taxable when withdrawn, but the earnings they produce are.

The point is, when you withdraw money from an IRA, some or all of that money may be subject to ordinary taxes, as will any subsequent earnings on the proceeds. The question in your case is: Why would you pay those taxes before you are ready to use the money? You are certainly not required to take money out of the IRA at this point -- the requirement for mandatory distributions starts at age 70 1/2 for traditional IRAs, and there is no such requirement for Roth IRAs.

You are allowed to roll money over from an IRA at one institution to an IRA at another institution with no tax penalty. You are also allowed to hold CDs within an IRA. So, why not simply start an IRA account at the new institution, and invest the money in CDs? Just make sure your old institution is notified in writing that this is a transfer to a new IRA, so the transaction will be recorded as a rollover rather than a distribution. Also, be sure to specify to the new institution whether you want a traditional or Roth IRA -- most likely, you will want to convert to the same type of IRA you had at your old institution.

Finally, before you commit to a new institution, be sure to shop for the best CD rates. If this money is going to remain in your IRA for a while, you will want it earning the best CD rates you can find until you are ready to start taking distributions.

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