There are many types of certificates of deposit, and they don’t all conform to the same rules. Most are designed to be left in the bank you opened them with until the end of the fixed term, since you’ll be charged a penalty if you try to cash out early or transfer the CD to another bank. IRA CDs are a type of CD that’s held in a retirement account. With careful planning, you can move an IRA CD from one bank to another without getting taxed – but you may still face an early withdrawal penalty if you move the money before the CD matures.
Understanding Certificates of Deposit
A traditional CD is simply a bank deposit. It pays a defined rate of interest for leaving the money in the account for a fixed period, generally six months to five years. In return for tying your money up, you should get a higher rate than you would get with a regular savings account.
Technically, you can cash out the CD and open a new CD with a different bank at any time. But if you do this before the fixed term ends, you typically will have to pay an early withdrawal penalty. This may be a one time fee of, say, $100, but it’s usually equivalent to a few months’ worth of interest.
Understanding the IRA CD
An IRA CD is an Individual Retirement Account where all the money is invested in certificates of deposit. In other words, it combines the features and rules of two financial products: IRAs and CDs.
As a CD, your money will be locked into the account for the fixed period, during which time your money will be earning interest. As an IRA, the money will grow on a tax-deferred basis inside the CD. This means you do not pay tax on your money as it grows. You are permitted to contribute up to $6,000 (as of 2021) to an IRA, including an IRA CD.
You are, however, subject to the same limitations on withdrawals as you would be with both a conventional CD and with an IRA. That can make transferring an IRA CD to another bank a difficult process.
How to Move an IRA CD
Ideally, you will wait until the CD matures. At the end of the fixed term, you are free to make changes like moving the money to another account. If you try to move the money before the end of the term, you may have to pay early withdrawal fees as with any regular CD.
Some IRA CDs are set to automatically renew once the fixed term ends. If this applies to your product, you should notify the bank that you do not want the CD to renew. You may have to fill out paperwork to cancel the automatic renewal.
Then, once the CD matures, tell your bank to close the IRA CD account and move the money to your IRA savings account.
Now the Clock Starts Ticking
As soon as you start the process of moving your money to another bank, the IRA clock starts ticking. You have 60 days to move the IRA savings account from one bank to another. After 60 days, the transaction will be treated as a distribution from the IRA rather than a transfer. You’ll then have to pay income taxes on the interest you’ve earned, plus a 10 percent penalty on the balance of the CD.
It’s unusual for banks to take more than 60 days to transfer money, but it’s on you to request and fill out the paperwork quickly to avoid the tax penalty. The new bank should lead you through the process. Ask for help transferring the IRA CD from your old bank and they will send you the paperwork you need to fill out. Most times, you will not see the money – it will simply transfer from the old bank to the new bank.
- While you may be tempted to conduct an indirect rollover--cashing in the CD and depositing the money elsewhere--because it's faster, this triggers an automatic 20 percent federal tax withholding. This is not recouped until tax refunds are sent, but you are still required to put that amount in the new IRA account to avoid its being considered a distribution.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.