Can I transfer from an IRA to a CD?
July 31, 2012
Q: Can I transfer money from an IRA to a CD at the same bank without penalty?
A: Tread carefully. Transferring money out of an individual retirement account (IRA) can have severe tax consequences.
IRAs vs. CDs
A good starting point is to understand that an IRA and a certificate of deposit (CD) are not really comparable alternatives to one another. An IRA is a form of tax structure, whereas a CD is an investment vehicle. In other words, the IRA has to do with committing money to retirement saving in exchange for certain tax benefits, while the CD is a way of earning interest on that money.
How taxes play a role in deposits
One way to think of this is that an IRA is a type of a container, while a CD is an example of something you might put in that container. When you put money into that container, you are making a deal with the IRS: You won't withdraw it until you are 59 and 1/2 years old and they will give you a break on taxes.
For traditional IRAs, any amount you put in that container can be deducted from that year's taxable income, and that amount plus anything you earn on it won't be taxed until you withdraw the money. If it is a Roth IRA, you pay taxes on the contributed amount upfront, but you do not pay taxes on anything earned on that contribution.
How to change investments within an IRA
Once money is put into an IRA, it can be invested in a CD, stocks or many other types of financial instruments. You can change from one type of investment to another, as long as it stays within that IRA. That's why it's very important to specify that any investment changes should be made within the IRA. Since you are making your change within the same bank, this should be easily done, but be sure to confirm your instructions in writing.
If you were transferring to a different bank, you'd have to start a new IRA, but as long as you document that the money is being directly transferred into the same type of IRA, there shouldn't be tax consequences. It gets a bit more complicated if you are switching from a traditional to a Roth IRA, and you would want to talk to an adviser about whether that makes sense for your situation.
Why open an IRA for investments
The ability to change investment vehicles within an IRA, or transfer from one IRA to another, allows you to shop for the best CD rates or pursue new investment opportunities. The key, though, is not letting the money leave the confines of an IRA. Otherwise, there is likely to be a 10 percent tax penalty, on top of any ordinary taxes, if you are younger than 59 and 1/2.
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Comment: Have you thought about transferring from one investment vehicle to another? What are your reasons?
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