Options When an Inherited IRA CD Matures

by Leslie McClintock

Certificates of deposits (CDs) are known as "time deposits," because you are committing to leaving your money with a bank for a specific period of time. This helps the bank, because they are reasonably assured that you won't be calling for your money until the end of the term. They can therefore invest in a wider variety of instruments with less worry about liquidity. In return, they typically offer a somewhat higher rate of return than you can get in a passbook savings account. When the CD matures, however, you have options with varying degrees of risk.

Roll it Over Into Another CD

CDs offer the security of FDIC insurance, guaranteeing your money against loss up to $250,000 per account holder. However, you are locking your money in for an extended period of time again. If interest rates rise, you miss out on the opportunity to earn more return on your money, unless you pay a substantial penalty for an early withdrawal.

Cash It Out

You can take money out of the CD and the IRA, if you choose. If you are under age 59 1/2, you must pay a 10 percent penalty on the early withdrawal, except for certain hardship circumstances. For traditional IRAs, you will also pay income taxes on the amount withdrawn. For Roth IRAs, you will pay an early withdrawal penalty only on the gain, provided the money has been in the account longer than five years. You don't need to pay income taxes on Roth IRA distributions.

Invest in Other Securities Within the IRA

While the brokerage company may charge you commissions, you have no capital gains tax liability on anything you transfer within the IRA. That means you can take the money from the maturing CD, and use the money to buy mutual funds, treasury bonds, stocks and other securities within the CD. You give up the protection of FDIC insurance, but you have the potential of much greater returns in the long run.

Self-Directed IRA

You don't have to stay in CDs, mutual funds, stocks and bonds within an IRA. You can also invest your IRA funds in real estate, small businesses, ranches or farming operations. You can't borrow from the IRA or use the IRA to purchase things for your own personal use. You also cannot directly purchase collectibles, alcoholic beverages, jewelry, gemstones and most precious metal investments under prohibited transaction rules. For a full breakdown, see IRS Publication 590, Individual Retirement Arrangements.

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