Can Any CD Be Designated as Part of a Roth IRA?

You can't contribute a CD directly to an IRA.
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Uncle Sam gives you lots of latitude on the types of investments you can hold in your Roth individual retirement account, including allowing certificates of deposit. But while you can invest your IRA in CDs, you're going to need to put the money in the Roth first. You're not allowed to "designate" an existing non-IRA CD to become part of a retirement account.

Cash Contributions

Roth IRAs only accept cash contributions. Putting in assets like stocks or certificates of deposit isn't allowed, even if their fair market value is below the yearly contribution limit. For example, if you have a CD worth $3,000 and your contribution limit is $5,500, you're still not allowed to designate the CD as part of the IRA, even though it's worth less than the limit.

Existing CD

If you have an existing CD, just cashing it out won't always be enough to allow you to stash money in a Roth IRA and then reinvest in a CD inside the account. To contribute to an IRA, you must have compensation and your modified adjusted gross income can't exceed certain yearly limits. Your interest on the CD counts as income. But the money you cash out of your CD doesn't count as compensation, so you'll need income from working or taxable alimony to make a contribution.


Once you get the money in your Roth IRA, you can invest in any of the CDs your financial institution offers. Because it's likely to be decades before you tap your IRA in retirement, you could go for a longer-term CD. But if you have to take an early withdrawal down the road, you could be hit with an early distribution penalty from the IRS and a CD early withdrawal penalty from the custodian.

Roth Conversion

If you have a CD in a traditional IRA, you can convert the IRA to a Roth without cashing out the CD first. There's no limit on how much money you can shift from a traditional IRA to a Roth in a year. You just need to be able to pay the taxes on the swap, preferably with money from outside your IRA. If you pay the taxes using IRA funds, that amount is considered a taxable distribution. You may also have to pay a 10 percent early withdrawal penalty.

Let's say you have a $10,000 CD in your traditional IRA that you'd like to convert to a Roth IRA this year because you expect to be in a lower tax bracket. If you move the CD to a Roth without cashing it out, you'll owe taxes on the $10,000 conversion. If you use $1,000 of the money to pay the taxes, you'll also owe a $100 tax penalty because that's an early withdrawal.

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