A certificate of deposit is a conservative investment that works like a loan. In exchange for your investment, the bank issuing the CD promises to repay your money with interest. However, accessing your money before the CD matures could cost you in terms of interest. And in certain cases, cashing in early also incurs taxes, penalties and commission fees.
A traditional CD is offered by a bank to its own customers. Short-term CDs typically pay interest only at maturity, while longer-term CDs might make regular interest payments. If you want to sell a traditional CD before it matures, restrictions and penalties are set by your bank. In most cases you can sell a CD prematurely, but you will lose a certain amount of interest. For example, if you want to get out of your six-month CD after only three months, the bank may withhold a month or two of interest. Some CDs don't allow early liquidation at all, although typically these are CDs with very short terms, such as one month.
Brokered CDs are essentially bank CDs that are sold or resold by other institutions. Although brokered CDs are issued by the same types of banks that sell traditional CDs, they are sold and priced differently. Traditional bank CDs typically don't fluctuate in value. Brokered CDs, on the other hand, trade in a national marketplace and are subject to the laws of supply and demand. The value of brokered CDs can rise and fall along with market interest rates, with higher rates leading to lower CD prices. If you sell a CD in your IRA after interest rates have gone up, you might lose money on your investment, even though brokered CDs typically don't carry an early liquidation penalty. Your broker may charge a commission to sell a brokered CD at any time.
One of the benefits of selling a CD in an IRA is that you don't have to worry about taxes on your sale or on your interest. In all types of IRAs, you don't have to pay tax on any investment gains as you earn them. If your CD pays interest, you don't have to report that payment to the Internal Revenue Service. Similarly, if you sell a brokered CD at a profit, that capital gain goes similarly unreported. However, income taxes will be due when you withdraw money from a traditional IRA. Another benefit of bank CDs is that they are insured by the Federal Deposit Insurance Corp. for up to $250,000 per person per bank. If the bank can't keep its promise, the federal government steps in and pays you off.
Even if you can cash in your IRA CD early, you should weigh the benefits against the costs. If you want to sell your CD to take the money out of your IRA, you'll have to pay ordinary income tax on that withdrawal, unless you have a Roth IRA. If you're younger than 59 1/2, you'll also face a 10 percent early-withdrawal penalty unless you meet certain conditions such as becoming disabled or buying a home for the first time. Selling a CD to move into another investment is prudent only if the potential gain of the new purchase outweighs the penalties and loss of future interest that result from the sale.
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