Q: I'm 62 years old and have a traditional IRA that is maturing and I want to put it in a high interest rate CD at a different bank. Can I take the money out and take the check to the other bank for the CD without any penalty or taxes on that money?
A: You should be able to make this kind of individual retirement account transfer without taxes or penalty. But you must take care how you do it to be sure you don't inadvertently trigger tax consequences.
How to avoid taxes and penalties when transferring an IRA
Specifically, the wording of your question raises three issues:
1. Make sure you roll over into a traditional IRA
People often refer to IRAs and certificates of deposits interchangeably. While they are often linked, they represent different things.
IRAs vs. CDs
IRAs. An IRA is a tax arrangement, a retirement account that allows you to defer taxes on contributions (for a traditional IRA) and on investment earnings. The money in this tax arrangement can be invested in a variety of ways, including savings accounts and CDs, but also more long-term investments like stocks and bonds.
CDs. A CD is not a tax arrangement but a type of deposit account, usually paying a specified interest rate over a particular length of time.
The key here is to make sure the CD at the new bank is within an IRA. Because you are above age 59 1/2, you could take money out of your IRA without penalty. But you would have to pay ordinary income taxes on the withdrawal and then you would lose the tax deferral on future investment earnings.
2. Look into a trustee-to-trustee transfer
You could get a check from your existing IRA and then deposit it in a new IRA. However, that withdrawal might be subject to tax withholding since it is going through you rather than directly into the new IRA. To avoid this you should look into a trustee-to-trustee transfer, where one IRA trustee (in this case, your first bank) transfers the money directly to another IRA trustee (your new bank). Trustee-to-trustee transfers are not subject to withholding.
Also, this might be the most efficient method of transfer, since it is important to make the rollover to new IRA within 60 days or else the withdrawal would be subject to taxation. Just be sure to check first on any bank fees associated with a trustee-to-trustee transfer.
3. Find the best CD rates before transferring
Take the time to compare banks to find the best CD rates before you transfer, because unless you do a trustee-to-trustee transfer, you will be effectively locked in for a year. The IRS only allows tax payers a single IRA transfer within any 12-month period, though trustee-to-trustee transfers are exempt from this limitation.
The kind of transfer you are talking about can be a good technique for earning a little more interest on your retirement savings by finding the best CD rates. Just make sure you stay within the guidelines for this kind of transfer, so that your extra interest gains are not negated by unnecessary tax consequences.
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