An individual retirement arrangement (IRA) is a tax-advantaged account that is meant to encourage workers to save for their golden years. A time deposit account -- also known as a certificate of deposit -- is an account into which you deposit money that earns a given interest rate over a predetermined period. An IRA time deposit account combines these two concepts; it is subject not only to the bank's restrictions on deposits and withdrawals, but also to Internal Revenue Service regulations.
You can think of an IRA as simply a container that puts a certain tax treatment on the assets within the account. Those assets can be stocks, bonds, mutual funds, exchange-traded funds, or cash held in a bank account. A time deposit account, or certificate of deposit, held at a bank is one possibility for your IRA funds. The CD will have all the features that a non-IRA CD would have, such as restrictions on withdrawal, plus the limitations that the IRS places on IRAs.
The IRS sets, and from time to time revises, the limit on how much people can contribute to an IRA over the course of a year. As of 2013, that limit is $5,500, or $6,500 for those 50 and older. The limit is per individual and is in force no matter how many IRAs you open. For instance, if you open a time deposit IRA and contribute $3,000 to it, you can contribute no more than $2,500 that year to any other IRA you might own.
Many banks establish deposit minimum amounts for CDs. The minimum will vary from bank to bank, and may even vary among CD products at the same bank. For example, the minimum for a 9-month time deposit might be $1,000 while that for an 18-month CD could be $500. Account term and interest rate might influence the minimum the bank establishes. If the minimum exceeds the IRA contribution limit, you'll have to choose a different CD.
An IRA time deposit account has two layers of early withdrawal penalties. Most banks charge a fee -- for example, several months' interest -- if you take money out of any time deposit account before the term has run. You will also owe an early withdrawal penalty if your withdrawal doesn't meet IRS rules. For a traditional IRA, you must pay a 10 percent penalty, in addition to ordinary income tax, on withdrawals you make before the age of 59 1/2. If you hold the CD in a Roth, you won't owe the government a penalty on any contributions you withdraw, but if you also withdraw earnings early, you will likely owe taxes and penalties.
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