December 9, 2023

IRA CD Rates

IRAAlthough IRA (Individual Retirement Arrangement) Certificates of Deposit act like other CDs, in that they have a fixed term before they expire and are accessible as income, they are special because the rules concerning early withdrawal are unique. A CD that is not an IRA CD may cost you some months of interest if you withdraw the money before the fixed term expires. An IRA CD may be subject to a 10 percent tax in addition to the tax on the amount withdrawn if you withdraw the funds before you reach age 59 1/2 and do not roll the funds over into another IRA.

Tax Deductions for Loyal Patrons

IRA CDs that are not Roth IRA CDs are fully taxed on the amount of money withdrawn that represents your untaxed contributions as well as the interest earned. There is a table within Federal Form 590 that is used to determine the amount you must withdraw from an IRA CD starting the year after you reach age 70 1/2. Depending on your level of earned income, you are allowed a tax deduction in every year you contribute to an IRA until you reach that age, whether it is a CD or not. If you contribute to a Roth IRA, you are not allowed a deduction on that year’s taxes.

Although it may not be a point that can be argued successfully, the theory behind a traditional IRA is that you are at a higher tax bracket when you are eligible to contribute to this IRA and will end up in a lower tax bracket when you begin to withdraw the funds. This may or may not be the case and it largely depends on the caprices of government in modeling tax brackets to suit the current monetary situation. It also does not take into account the person who chooses to work beyond the age of 70 1/2.

Roth IRAs as a Viable Alternative

If you do not think you fit the traditional mold, consider the Roth IRA CD. All the money you contribute to a Roth IRA CD is already taxed at whatever current tax bracket you are at. Any interest that accumulates along with any distribution you take is tax free. The federal government has set up rules to eliminate using this type of investment purely as a tax shelter. There are many types of income that are excluded from use as contributions to a Roth IRA CD.

The Stepladder Approach

stepladder approchJust as research is important for any investment decision, the rate of return on CD’s is not the only consideration. There is a strategy called a stepladder approach that recommends that you invest in a shorter term CD while interest rates are not as attractive as you would like and then when they climb higher you can invest in longer term CDs. If the interest you are able to earn on a more attractive CD comes up before the term expires on your present investment, consider whether it will pay you to swallow the penalty and go with the higher CD rate.