IRA Cds -- Looking For Clarification

cdqueen | Feb 23, 2019 | 78 posts since 2016

If a young 40s or 50s investor (at least 10 years from retirement and likely way more) arranges a 5 or 6 year term IRA CD that matures well before investor draws RMDs or files for SS, what ramifications attach to the maturing funds? Are they subject to any limitations or restrictions or particular tax treatment? Must they be re-invested in IRA designated products ever after or not? Asked another way, once IRA designated, must matured pre-RMD mandated funds always remain IRA funds in one fashion or another or are they free (of penalty or restriction) to be re-invested into other asset classes? Thank you for any additional clarity added by DA readership.

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Answers

MY2CENTSWORTH | Feb 23, 2019 | 436 posts since 2016

cdqueen...as me1004 stated it is always optional based on your needs and where you want to invest the IRA funds as the CD matures....HOWEVER...be very careful if you actually withdraw the funds to move to another financial institution. The correct term for that is a ROLLOVER and can be done only ONCE every 12 months (not a calendar year). The best way to do that is a DIRECT TRANSFER from one financial institution to another. There are no limits on the number of times that you could do that so the term of the CD would have no effect at all. Key take home message here is...Once an IRA...always an IRA unless you want to be taxed on the DISTRIBUTION. Of course you did not mention whether the IRA was a Traditional or a Roth and there are some different rules for each....but again to answer your question the IRA funds must remain IRA funds. Hope that helps...if still unclear...post another question.

cdqueen | Feb 23, 2019 | 78 posts since 2016

Definitely helps ddbrege, thank you. Particularly two salient points: once IRA funds, always IRA funds or suffer early distribution penalty. Also nuanced distinction between withdrawals and roll overs within 12 months, not calendar year. So the incent to rate chase higher yield remains the same for IRA designated maturities as with other types of maturing funds. Ideally a maturity would coincide with a better rate offered by the same institution, so as to avoid a rollover to position better elsewhere. Only one allowed within 12 months rule seems to incent laddering, which is a typical CD feature. Thank you for those clarifications.

Ally6770 | Feb 24, 2019 | 4,294 posts since 2010

If the institution is near you or if they charge you to move the IRA, I have had them make the check out to the new institution for the benefit of me as a traditional or roth IRA and mailed it myself.
They did not charge me when I did it this way and it is much quicker than waiting them to withdraw it and mail it and then wait for the new institution to put it in your new account. Also if you move it open your new account at the new institution. They will have papers for you to fill out requesting that the money be transferred to them if you are not doing it yourself.

cdqueen | Feb 24, 2019 | 78 posts since 2016

Thank you Ally6770 for this detailed steps best method to avoid financial penalty and or down time between transfers.

me1004 | Feb 23, 2019 | 1,379 posts since 2010

The CD maturity has no effect on the IRA classification of the funds. The funds would still be in the IRA, whether as an automatically renewed CD or as whatever the arrangement is with that institution for the funds at maturity -- but yes, they would have to stay int he IRA to avoid tax or penalty. Only if you actually withdraw the funds from the IRA would you face tax or penalty. You can transfer the funds to another institution and remain in the IRA.

Further, you used to be able to, and I believe still can, take money out of your IRA without tax or penalty as long as you put it back in within 60 days. I believe that is so you can move the money where you want yourself if you prefer not to let the two institutions do it without it being taken out of your IRA. (Double check to make sure this has not been changed in recent years, and there probably is some kind of paperwork to be done for this.) You get 60 days in which to accomplish that, but what you do with it during those 60 days is up to you. If you don't get it back into the IRA in time, you will be taxed and hit with any penalty that applies. Some people point out that this move effectively gives you the ability to take a 60-day interest-free loan.

Ally6770 | Feb 25, 2019 | 4,294 posts since 2010

There may be no tax or penalty from the feds but there could a penalty from the bank or credit union.

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