One of the benefits of having an Individual Retirement Account is your control over the investments in the account. If you buy long-term certificates of deposit in your IRA, you can usually sell or change them whenever you would like. However, financial penalties may be involved with such a change. The consequences of changing a long-term IRA CD can vary based on whether you bought the CD directly from a bank or a broker.
A CD is a federally insured deposit account offered by banks and thrifts. CDs can be attractive due to this insurance and the fact that they generally yield more than short-term savings options such as money market accounts. While CDs traditionally had maturity dates of three to six months, some banks do offer longer-term CDs. If you want to sell or change a long-term bank CD, whether or not it is in your IRA, you generally have to pay an interest penalty equal to a few months' interest. The bank will credit your account with the remaining sales proceeds.
If you buy CDs at a bank, you can typically purchase CDs issued by only that bank. If you work with a financial services firm, you can often buy CDs from a number of different banks. However, unlike bank-purchased CDs, brokered CDs trade on the secondary market, meaning they are subject to the effects of supply and demand. If you change a long-term IRA CD that you purchased from a broker, you won't have to pay an interest penalty as you would at a bank. However, the price you receive for your CD may be higher or lower than the amount you paid.
From a credit perspective, CDs are generally safe investments. In addition to being backed by the financial strength of the issuer, your CDs are insured by the Federal Deposit Insurance Corporation for up to $250,000 per bank. However, longer-term CDs can carry more interest rate risk, which refers to the tendency of income investments to trade down in value when interest rates rise. While bank CDs are generally protected from this risk, since you cannot sell them in the open market, brokered CDs are susceptible to it. To protect against this risk, you can change your longer-term CDs to those with shorter maturities.
One of the hazards of changing investments in a regular taxable account is the capital gains tax. If you make a profit on any trade in a regular account, you will owe capital gains tax. In an IRA, all taxes are deferred until you take a withdrawal from the account, so you don't have to worry about taking a profit on an IRA CD. While bank CDs do not trade up and down in value, brokered CDs do, so it is entirely possible you could have a profit on a brokered CD.
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