IRAs are a good home for investments because you can defer or even avoid tax on your income and profits. Certificates of deposit often find a home in IRAs because they are conservative, income-generating investments. If you want to cash out a bank IRA CD, you have that right as the account owner. However, you'll have to weigh the cost of such a move, in terms of missed investment opportunity, taxes and penalties.
Wait for Maturity
Unless you have an immediate need for your money, the best way to cash out a bank IRA CD is simply to let it mature. Whenever you buy a CD, it comes with a date when it will pay off, known as its maturity date. By letting a CD mature, you don't have to make a physical sale. As a result, you don't have to pay any commissions or lost-interest penalties. Since many CDs have short terms, often just three to six months, you can often get your money fairly soon just by waiting.
If you want to cash out your CD and can't wait for it to come due, you'll have to sell it prematurely. The cost of such a move depends on the nature of your CD. If you own a CD issued by your own bank, you'll have to pay whatever penalty the bank institutes. For most CDs, this will usually be from three to six months of interest. If you own a short-term CD, this penalty may eat up all of your interest. If your bank has a brokerage division, you may have bought a brokered CD. A brokerage can sell you CDs from other banks, not just your home bank. If you want to sell it, you'll have to pay a commission, rather than an interest penalty. In either case, you'll likely end up with less money than you originally invested.
Take A Distribution
After you sell your CD, you can do whatever you'd like with your money. However, if you choose to take it out of your IRA, you'll face an additional layer of taxes and penalties. IRAs are long-term investment accounts. The Internal Revenue Service tacks on a 10 percent penalty if you want to get your money out of your IRA before you turn 59 1/2. For most IRAs, you'll also owe income tax on money you cash out of your IRA. If you have a Roth IRA, you may be able to dodge the tax. However, you'll still owe the 10 percent penalty if you're under 59 1/2, and you'll even owe income tax if you haven't had the account for at least five years.
Just because you cashed out a bank CD doesn't mean you have to withdraw the money from your IRA. If you can find other money to pay your current expenses, or if you simply weren't happy with your CD as an investment, you should try to keep the money in your IRA. By reinvesting the money in your IRA -- or even keeping it liquid in your IRA money market account -- you won't have to pay taxes or penalties. Additionally, you won't be depleting the money you've set aside to build your retirement nest egg.
- Bankrate.com: CD Early Withdrawal Penalties Can Sock You
- IRS: Publication 590: Are Distributions Taxable?
- IRS: Publication 590: Early Distributions
- Bank CDs Versus Brokered CDs
- IRS: Publication 590: What Are Qualified Distributions?
- U.S. Securities and Exchange Commission: High-Yield CDs -- Protect Your Money By Checking the Fine Print
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