IRS Rules on IRA CD Accounts

For older investors with less time to recoup potential stock-market losses in their IRAs, or for younger investors with lower risk tolerance, a bank certificate of deposit is a good place to invest IRA funds. The return on investment is guaranteed, and the principal is protected by FDIC insurance. The rules for investing in IRA CDs are the same as other IRA investments, with a few twists due to the specific maturity terms of CDs.

Traditional or Roth?

When you open your IRA account at the bank where you'll be investing in your CDs, you must decide between a traditional or Roth IRA. With a Roth, you never receive a tax deduction for your contribution, but your withdrawals at retirement are tax-free. You are not allowed to make a Roth contribution if your income exceeds an amount set by the IRS. A traditional IRA may allow you to take a deduction from your taxable income for your contribution amount depending on your income and if you're covered by an employer-sponsored pension plan. Even if you can't claim a deduction because your income is too high, you can still make a nondeductible contribution to your traditional IRA account.

Earned Income

You must have earned income to contribute to your IRA, and purchase new CDs held in the IRA account. Earned income includes income from wages and salary from a job, as well as self-employment income from your own business. Alimony received also counts as earned income.

Maximum Contributions

As of April 2013, you can contribute up to $5,500 per year to your IRA account to purchase new CDs, and up to $6,500 if you're age 50 or older. If your earned income is less than this amount, you can only contribute up to the amount of your earned income for the year. If you're married, your spouse can also contribute the same amount to her own IRA. Both of your contributions cannot exceed your combined earned income. For example, if you have a combined earned income of $9,000 for the year, both of your total IRA contributions cannot exceed $9,000.


Any withdrawal from your IRA CD before you reach age 59 1/2 will be subject to an IRS tax penalty of 10 percent of the amount you withdraw. The IRS will waive this penalty if the withdrawal is for an approved purpose, such as higher education expenses or certain medical expenses. A withdrawal of up to $10,000 for a first-time home purchase is also exempt from the tax penalty. Traditional IRA withdrawals are taxed at your normal income tax rate, unless you made non-deductible contributions at any time. At age 70 1/2, you must begin withdrawing money from your traditional IRA, but a Roth IRA has no mandatory withdrawal requirement.

Rollovers and Transfers

You can transfer money between IRA accounts or 401(k) accounts without paying any taxes or penalties, and these transfers are also not subject to the maximum yearly contribution amount. This is beneficial if you want to transfer money to a bank to purchase new CDs. You can request a trustee-to-trustee transfer, and let the receiving IRA trustee at the bank handle the transfer. You can also request a withdrawal from your IRA, and re-deposit these funds into another IRA of the same type within 60 days, and not owe any taxes or penalties.

Additional CD Requirements

Most bank CDs have a specific date of maturity, and withdrawing money from that CD before that maturity date means that you must pay a penalty to the bank for this early withdrawal. To take mandatory withdrawals from your IRA, you must plan the maturity dates of your CDs when you purchase them to avoid a bank penalty for early withdrawal. The same is true if you plan to transfer your money to another IRA account. The bank penalties for early withdrawal are completely independent of any IRS tax penalties that may apply.