Certificates of deposit are popular investments for individual retirement accounts because they are insured, generally up to $250,000. When you buy a CD, it comes with a stated term at which it pays back your investment, known as its maturity date. While you can cash out a CD whenever you want, there are usually penalties involved if you sell it before it matures. The amount of the penalty will vary depending on the type of CD.
If you buy a bank-issued CD, you'll pay an interest penalty if you sell it prematurely. Federal law requires banks to charge at least one week's worth of interest if you try to cash in your CD early, but most banks will charge even more. Early-withdrawal penalties on bank CDs typically range from three to six months' interest. Short-term CDs, such as a 30-day CD, might require the sacrifice of all interest. Some banks may charge even more.
If you buy a CD from a broker, rather than directly from a bank, you might not have to pay any interest penalty at all. However, you might risk some of your principal instead. Brokered CDs trade on the open market, like bonds, so their value can fluctuate from day to day. When interest rates in the market go up, the value of brokered CDs goes down, and vice versa. If you decide to sell your brokered CD after rates have fallen, you might actually make a profit when you cash in your CD. However, if you sell after rates have risen, you could lose money.
Whenever you sell a CD, you no longer earn interest on your money. While you can buy another investment with that money, you might not earn the rate that your CD was paying you, or you might have to take on additional risk. This is known as opportunity cost, which refers to what you give up when you sell your CD in order to use the money for something else. Whenever you make an investment decision, such as selling your IRA CD, you'll have to consider the opportunity cost of your choice.
If you sell a CD in your IRA and decide to take the money out of your account, you'll face additional costs. Regardless of what you intend to use the money for, IRA withdrawals are generally taxable. The only exceptions are if you made non-deductible contributions to a traditional IRA, which are atypical, or if you take original contributions out of a Roth IRA. If you're under age 59 1/2 when you take the money out, you'll also owe a 10 percent early withdrawal penalty. There are exceptions to this penalty as well, but they are limited to special situations, such as certain medical, educational or homeowner expenses.
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