Bottom Line. You can rollover your 401(k) account into a CD without any penalties or taxes. But you need to make sure you're rolling over into an IRA CD, specifically. And always ensure to roll over into a like-kind account, whether a traditional or Roth retirement account, or you might get hit with a surprise tax bill ...
Bottom Line
Moving the entire 401(k) balance into a CD could bump you up to a higher tax bracket. Remember, too, 401(k) money grows tax-free. Consider keeping one to three years of expenses in cash. Make sure your 401(k) assets align with your goals.
The IRS allows those under the age of 59 ½ to withdraw from their 401(k) plans without the 10% additional penalty if they do so in the form of a series of substantially equal payments (SoSEPP) over their remaining life expectancy.
Generally, there are no tax implications if you complete a direct rollover and the assets go directly from your employer-sponsored plan into a Rollover or Traditional IRA via a trustee-to-trustee transfer.
One of the primary disadvantages of CDs is the lack of liquidity compared to other types of investments. When you invest in a CD, your funds are typically locked in for a specific term, ranging from a few months to several years.
You can either have the financial company complete a direct transfer to the new account, or withdraw the money yourself and deposit it within 60 days in the new account without penalty.
Orman agrees that CDs aren't ideal for long-term growth but are valuable for specific, near-term goals due to their safety and fixed returns. Orman tells consumers to put their money in CDs only when they have funds to keep them safe for a limited time.
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
Roll over your 401(k) to a Roth IRA
If you're transitioning to a new job or heading into retirement, rolling over your 401(k) to a Roth IRA can help you continue to save for retirement while letting any earnings grow tax-free. You can roll Roth 401(k) contributions and earnings directly into a Roth IRA tax-free.
Your tool to create a more rewarding retirement plan. If you've already established retirement savings through an Individual Retirement Account, you may be ready to roll your contributions into an IRA CD, that will grow your funds with a fixed rate guarantee of return throughout your retirement.
Generally, you have to pay taxes on CD interest. CD interest over $10 is considered taxable income, and you have to report these earnings on your tax return. CDs come in varying lengths, or terms. Terms can range from less than a month to five years or more.
With a 401(k) plan, you can use a direct or indirect rollover to move money from one account to another. A direct rollover allows you to move money from your 401(k) to an IRA CD without ever receiving any of the money yourself. Indirect rollovers send the money to you and you then have to deposit it into a new account.
Can you roll over a 401(k) to an IRA without penalty? You can roll over money from a 401(k) to an IRA without penalty but must deposit your 401(k) funds within 60 days. However, there will be tax consequences if you roll over money from a traditional 401(k) to a Roth IRA.
From mid-2023 to September 2024, many banks offered attractive certificate of deposit (CD) rates of around 5%. But now that the Federal Reserve has been cutting rates, CD yields are dropping too. Despite lower rates, CDs remain a solid option for growing your savings.
If you put $500 in a CD for five years, how much would you make? This depends on the CD rate. A five-year CD at a competitive online bank could have a rate of 4.00% APY, which would earn around $108 in interest in five years. A five-year CD with a 1% rate would earn about $26.
As a general rule, if you withdraw funds before age 59 ½, you'll trigger an IRS tax penalty of 10%. The good news is that there's a way to take your distributions a few years early without incurring this penalty. This is known as the rule of 55.
401(k) Rollover
The easiest way to borrow from your 401(k) without owing any taxes is to roll over the funds into a new retirement account. You may do this when, for instance, you leave a job and are moving funds from your former employer's 401(k) plan into one sponsored by your new employer.
Borrowing from your 401(k) may be the best option, although it does carry some risk. Alternatively, consider the Rule of 55 as another way to withdraw money from your 401(k) without the tax penalty.