Q: Can I move an IRA certificate of deposit into my mutual fund IRA without penalty?
A: Funds in IRAs can be invested in anything from money market accounts to stocks or commodities. You have flexibility about how you fund your IRA--as well as the freedom to move an IRA from one investment vehicle to another without penalty.
However, you must take care to move your money in the right way.
As you probably know, transferring money out of an IRA is a taxable event, and if you are below the age of 59 1/2, there would likely be an additional penalty as well. So, whenever you move money from one IRA account to another, caution must be taken to make sure it doesn't appear to be a distribution.
First of all, it is important that the transfer is between IRAs of the same type. For example, transferring funds from a traditional IRA to a Roth IRA is usually a taxable event, though the early distribution penalty would not apply. However, you can transfer from one traditional IRA to another without a taxable event or penalty.
This type of transfer is known as a "trustee-to-trustee" IRA transfer. It means that the money is going from one IRA trustee to another, and thus is not being distributed outside the IRA. Find out from both the bank holding your CD and the mutual fund company with your IRA account how they handle such transfers, and make sure you instruct both parties in writing that this is to be a trustee-to-trustee IRA transfer.
Finally, the above assumes your certificate of deposit has run its term, since early withdrawal could trigger another kind of penalty. If you are seeing a CD from a few years ago mature, it's understandable that you'd be looking for greener pastures--even today's best CD rates are nowhere near where rates were just a few years ago.
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