When you open an Individual Retirement Account (IRA) at a bank, your money either goes into a savings account or a certificate of deposit (CD). You can withdraw money from an IRA savings at any time, but you incur a penalty if you withdraw money from an IRA CD before it reaches maturity. When you cash in an IRA, you can delay paying taxes on the funds by rolling the money into another IRA account. If you do not move your money to another tax-deferred IRA, you will have to pay federal and possibly state income tax on the withdrawal.
1. Contact an investment broker and ask for suggestions about rollover options for your IRA. You can move IRA funds into mutual funds, annuities, stocks, bonds or other types of securities. You can also move the money into another CD or savings IRA at your bank or another institution, but you should call around to get the best rates before you make a decision.
2. Give your bank a copy of the CD contract or time deposit agreement that you received at account opening to a banker. You should also show the banker a valid form of identification, although your bank may not require ID if you frequent the bank and are regarded as a known customer. Tell the banker to close the CD.
3. Give the banker the name, telephone number and address of the institution that you intend to roll the funds into, as well as the account number of your IRA if you already established an IRA holding account at that institution. If you do not want to roll the CD, then ask the banker to make an official check payable to you.
4. Tell the banker if you want to withhold any money from the distribution to cover taxes. If you say nothing then the bank automatically withholds 10 percent for federal income tax. Some states also require banks to withhold money to cover state taxes, but in many states withholdings are optional and you can choose to pay the taxes at the end of the year. No taxes are withheld if you roll the money over to another IRA and instruct the banker to send the funds directly to that institution.
5. Ask for a receipt and ensure that the amount of your check and the receipt both show the correct amount. Your bank must report taxable withdrawals to the Internal revenue Service, so you should receive a 1099 tax form from your custodian before the end of the tax year. The 1099 includes details of the transaction, and you can use it when you file your taxes.
- When you invest in CD IRAs, make sure that you do not lock your money up for an extended period of time if you are close to the age of 70 1/2. Once you reach that age you must begin taking required minimum distributions (RMDs) from your retirement accounts that contain pre-tax money. If you close a CD to take an RMD, you may pay a CD termination penalty. If you do not take your RMD, you will pay a penalty to the IRS that amounts to 50 percent of the amount that you should have withdrawn.
- Penalties for cashing in CDs, including IRA CDs amount to at least seven days of simple interest, although at most banks you lose several months of interest when you cash in a CD before the end of the term. Some banks even charge principal penalties, but you can find out about any such fees by reading the account disclosures listed in your CD contract.
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