It's possible to roll 401(k) money into a CD without paying tax penalties but there are some guidelines for doing so. First, you'll need to make sure you're using the right type of CD. Specifically, that means an IRA CD. An IRA CD is a CD account that's funded through an IRA and enjoys its tax benefits.
Unless you're in retirement already, you shouldn't want a CD in your IRA. CDs are cash equivalents, not long term investments.
If you have enough saved that you only need a small percentage of return on investment, then a CD could be perfect for you when you retire. However, that option probably will not be the case for most people, as they will need larger returns than are typical for bank CD rates.
Broadly speaking, an IRA will usually make more money than a CD. This is because there is a wide assortment of investment options to choose from within an IRA.
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.
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.
When an IRA CD matures, you can renew your CD term length, move funds into a new CD term, move funds into a new financial institution's IRA, or withdraw funds if you're of retirement age. 12 If you're closing a traditional IRA CD at maturity and taking out the funds, you'll pay taxes on your withdrawals.
Any amount you deposit in a CD should be money you're comfortable locking up for the full term length. First, you should have enough cash in an emergency fund to cover at least three months of expenses, and this cash should be in an account where you can access it at any time without penalty.
If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run. Early withdrawal penalties can minimize returns.
Here's the good news: You can buy CDs in an IRA – and it's easy. Best of all, you could also benefit from the substantial tax advantages of an IRA 1.
Like IRAs and 529 plans, there are a variety of investments you can buy within an HSA, and your options depend on the financial institution that holds your account. If you invest in CDs within your HSA, you can avoid paying taxes on the interest, provided you use distributions to pay for qualifying expenses.
Also, note that rollovers need to be like-kind to avoid any tax consequences. If you have a traditional 401(k) and you want to roll it into a Roth IRA CD, for instance, the IRS requires you to pay taxes on the amount that you're converting.
IRA CDs are great for conservative, low-risk investors who want security against their initial capital and a guaranteed yield. If you will retire soon or are already retired, you may want to shift some of the nest egg into an IRA CD.
Your IRA CD earnings are tax-free until retirement; you pay for taxes when withdrawing the money. You must wait until you're 59.5 years of age and above to withdraw the funds. Otherwise, you'll pay a 10% penalty to the IRS. The withdrawn funds will also be eligible to tax.
Dave Ramsey's Perspective
He often describes them as “glorified savings accounts” with returns that struggle to keep pace with inflation. He argues that CDs might offer slightly higher interest rates than savings accounts, but they fall short as long-term investment vehicles.
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.
CDs are considered to be low-return investments but the return is guaranteed at the specific interest rate even if market rates go lower.
Shawn Valco, CFP®, former financial advisor, explains that the difference between regular CDs and IRA CDs is that with regular CDs, interest you earn is taxable in the year you receive it. Valco notes that with Traditional IRA CDs, tax on interest is deferred, allowing more money to stay in the IRA.