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1 What is a Certificate of Deposit?
A certificate of deposit (CD) is a deposit account that pays out interest on funds that customers commit for a specific period of time. Customers agree to not withdraw their money for the duration of the CD term. Customers who opt for longer CD terms or larger CD deposits tend to earn higher CD rates. Upon CD maturity, customers receive their principal and interest earnings altogether. If the customer wants to withdraw their money before CD maturity, the bank may impose an early withdrawal fee, which may end up reducing interest earnings and/or principal.
2 What is the difference between a CD and an IRA CD?
Essentially, an IRA CD is a CD that is held in a tax-sheltered account. Meanwhile, the interest earnings with a regular CD are subject to interest income taxes.
When opening an IRA CD, you usually have to designate what type of IRA (traditional or Roth) you plan to open for your CD. In a traditional IRA (contributions are tax-deductible), your interest earnings will be taxed when you take distributions from the IRA. In a Roth IRA (contributions are not tax-deductible), your interest earnings are tax free.
3 What happens when an IRA CD reaches maturity?
When an IRA CD matures, you may have the option to renew it and earn the current market rate. If you don’t renew the IRA CD or open another IRA CD, you may keep the funds in the IRA if the IRA was opened through a financial institution that offers other types of investments.
Otherwise, you’ll have to either perform an IRA transfer or rollover to another financial institution. An IRA transfer means that you move funds from one brokerage to a new brokerage. An IRA rollover means that you move funds from one IRA to an existing IRA.