Can You Transfer an IRA to a CD Without Paying Taxes?
Learn how a Certificate of Deposit can be held within an IRA, allowing you to secure a fixed return while maintaining your account's tax advantages.
You can move funds from an Individual Retirement Arrangement (IRA) into a Certificate of Deposit (CD) without incurring immediate taxes or penalties. This is done by holding the CD within the IRA, where it functions as an investment for the retirement funds. This structure allows you to benefit from a CD’s fixed returns while maintaining the tax-deferred or tax-free growth of your retirement account.
Understanding the IRA CD Concept
An “IRA CD” is not a distinct account but a standard Certificate of Deposit purchased with funds held inside an IRA. The tax benefits, such as tax-deferred growth for a Traditional IRA or tax-free growth for a Roth IRA, belong to the IRA itself. This “wrapper” shields the investment earnings from annual taxation, and a financial institution acts as the custodian.
The funds within the IRA CD are subject to all standard IRA regulations. This includes annual contribution limits, which for 2024 and 2025 are $7,000 for individuals under age 50 and $8,000 for those 50 and older. These limits apply to total contributions across all your IRAs, not just the portion invested in a CD. The movement of existing IRA funds into a CD is not a contribution but a change in investment allocation.
Methods for Moving IRA Funds into a CD
The most common and secure method for moving IRA funds to a CD is a direct transfer, often called a trustee-to-trustee transfer. In this process, you instruct your current IRA custodian to send the funds directly to the new financial institution that will issue the CD. This transfer is not considered a distribution or a rollover and therefore is not reportable on your tax return.
An alternative is the indirect rollover, where you withdraw the funds from your current IRA and receive a check made out to you. You then have a strict 60-day window from the date you receive the funds to deposit them into another IRA. If this deadline is missed, the entire withdrawn amount is treated by the IRS as a taxable distribution.
This method carries risks, and under IRS rules, you are limited to one such IRA-to-IRA indirect rollover in any 12-month period. The direct transfer is a much safer option for most individuals.
Important Rules and Considerations
Violating the 60-day rule for an indirect rollover makes the withdrawn amount part of your taxable income for that year. For someone in the 22% federal tax bracket, a $50,000 withdrawal could result in an $11,000 tax liability, plus an additional $5,000 penalty if they are under the age of 59 ½.
It is important to distinguish between IRS penalties and bank penalties. The CD itself will have its own terms for early withdrawal, which are separate from tax rules. If you need to access the funds before the CD’s maturity date, the bank will likely charge a penalty, typically calculated as a set number of months’ worth of interest. This penalty applies even if you are over age 59 ½.
Holding a CD within an IRA does not exempt you from Required Minimum Distribution (RMD) rules. Once you reach age 73, you must begin taking annual withdrawals from your traditional IRA. If your IRA funds are locked in a long-term CD, you must either have sufficient cash in the IRA to satisfy the RMD or break the CD and pay the bank’s early withdrawal penalty.
A benefit of holding CDs within an IRA is the protection offered by the Federal Deposit Insurance Corporation (FDIC). Funds held in an IRA CD at an FDIC-insured bank are protected up to $250,000 per depositor, per insured bank, for each account ownership category. This insurance provides security for the principal investment.