You can buy a certificate of deposit from a bank, credit union or an investment firm. In many instances, you can buy the same basic CD products with taxable funds or with Individual Retirement Account money. However, while the basic features of IRA CDs and regular CDs are the same, the two account types offer various different advantages and disadvantages.
Banks offer both CDs and IRA CDs with terms lasting for between a few weeks and several years. Generally, CDs pay a fixed rate of interest, although some institutions offer both regular CDs and IRA CDs that have adjustable rates. When a regular CD reaches maturity you can either cash it in or roll your money into a new CD term. When an IRA CD matures, you roll your account proceeds into another IRA investment or you can make a taxable IRA withdrawal.
You fund an IRA CD with pre-tax earnings and your account grows on a tax deferred basis until you make a withdrawal. You have to pay ordinary income tax on withdrawals but you also incur a 10 percent tax penalty if you cash in your CD IRA before reaching the age of 59 1/2. You can avoid the penalty but not the income tax in some instances such as if you use the proceeds to buy medical insurance or if you are disabled. Regular CDs offer no tax advantages and your earnings are fully taxable.
You can deposit as much as you like into regular CDs, although some banks place deposit limits on high yield accounts. In contrast, deposits to IRA CDs are capped not by your bank but by the Internal Revenue Service. As of 2012, you can make an annual contribution of up to $5,500 to an IRA unless you are 50 or older in which case you can contribute up to $6,500. Additionally, if you have access to a retirement plan at work then your contributions are limited based on your income. You cannot contribute to an IRA if you are single and have a gross adjusted income in excess of $68,000.
Generally, you can only make a withdrawal from a CD when the account has reached maturity. At that time, a grace period lasting for between 7 and 10 days begins and you can withdraw your money or make changes during this time frame. Withdrawals at any other point in time normally incur an penalty fee that may deplete your interest and principal. However, some banks offer so-called no risk CDs from which you can make withdrawals at any time. Withdrawal rules apply to both regular CDs and IRA CDs, although possible tax penalties could further deplete your earnings with the latter.
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