Tax Implications for Transferring an IRA CD to a Regular CD

Moving money from IRA CDs can have tax consequences.

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If you have retirement money invested in a tax-deferred individual retirement account (IRA), you may have some or all or some of those funds in certificates of deposit (CDs). Any shift of funds from an IRA CD to a regular CD held outside of an IRA will have tax implications. But if you shifted funds from an IRA CD to a regular CD that you keep within your IRA, the move is tax-free.

Income Taxed

If you convert an IRA CD to a regular CD or other investment outside of an IRA, the Internal Revenue Service considers the transaction to be an IRA withdrawal. If you are age 59 1/2 or over when you make the CD conversion, the amount involved is treated as taxable income and is added to your other income for the tax year.

Penalty Tax

If you were under age 59 1/2 when you converted your IRA CD to a non-IRA CD or other investment, the IRS will treat the transaction as an early IRA withdrawal. That means you would owe a 10 percent early-withdrawal penalty on the amount involved in addition to owing income tax on the money. The income tax and any penalty tax is levied on all of the principal and interest involved in the transaction.

CD Differences

All CDs are time deposits that pay you interest if you leave your money on deposit for a specific time period ranging from several months to several years. CDs pay higher interest than traditional savings accounts, which permit you to withdraw your money at any time. Banks and brokerages market certain CDs as being especially advantageous for IRA accounts -- but they also market regular CDs. A financial institution may distinguish its specially-labeled “IRA CDs” from its ordinary CDs by offering different interest rates and maturities. But just as often there is no difference apart from the label between a financial institution’s IRA CDs and its regular CDs.

Transaction Fees

You may face bank or brokerage account transfer fees, and your bank or brokerage could impose interest penalties if you terminate your IRA CD prior to its maturity date. But if you see an advantage to transferring your money from a so-called IRA CD to a regular CD that you still keep in an IRA, there are no tax consequences because the funds remain inside your IRA.