Transferring CD Account Funds To Trust Account
A certificate of deposit (CD) is a bank account that gives one a defined rate of return for holding the money in the account for a designated period of time, often three months or longer. An ordinary CD generates a 1099 form reporting the interest income on an annual basis [there is no way to avoid this tax]. But if opening a CD in an IRA account, one can move the money from one bank to another without incurring taxes. IRAs are taxed only on distributions.
While it may be tempting to conduct an indirect rollover--cashing in the CD and depositing the money elsewhere--because it's faster, this triggers an automatic 20 percent federal tax withholding. This is not recouped until tax refunds are sent, but one is still required to put that amount in the new IRA account to avoid its being considered a distribution.
Call the bank that currently holds the CD. Confirm the fact that the CD is in an IRA and the account's maturity date. The maturity date is the day the CD becomes liquid and one can take the money out without penalty. Tell the customer service representative that the CD should NOT roll over automatically into a new CD. One may need to visit the bank to fill out a form if the IRA CD is set up for automatic rollover. Explain to the customer service representative that the goal is to transfer a CD to another bank account. Allow the CD to mature and give the bank four to six weeks to transfer the assets.
IRA CD ACCOUNT NOTE: Investors transfer IRA CDs for many reasons: to stay under the $250,000 limit for Federal Deposit Insurance Corp. insurance, to get a higher rate or to work with a bank closer to home. Fill out a new IRA account application with transfer paperwork. Indicate that the CD should be transferred "upon maturity." One won't pay taxes regardless of when the CD is transferred, but moving the CD upon maturity avoids any bank penalties for closing the CD early. Submit the paperwork.
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