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Can I roll over a Roth IRA to a Roth CD without penalties?

Apr 14, 2014 by Deborah from Sandusky, OH in  |  Flag
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You should have no problem rolling a Roth IRA to a Roth CD. To give you a better understanding of your options between rolling over these funds indirectly or directly to the new IRA please read my following comments.

In general, a rollover is the movement of funds from one retirement savings vehicle to another. You may want, or need, to make a rollover for any number of reasons--your employment situation has changed, you want to switch investments, or you've received death benefits from your spouse's retirement plan. There are two possible ways that retirement funds can be rolled over--the 60-day rollover and the trustee-to-trustee transfer.

The 60-day, or indirect, rollover With this method, you actually receive a distribution from your retirement plan and then, to complete the rollover transaction, you make a deposit into the new retirement plan that you want to receive the funds. You can make a rollover at any age, but there are specific rules that must be followed. Most importantly, you must generally complete the rollover within 60 days of the date the funds are paid from the distributing plan.

If properly completed, rollovers aren't subject to income tax. But if you fail to complete the rollover or miss the 60-day deadline, all or part of your distribution may be taxed, and subject to a 10% early distribution penalty (unless you're age 59½ or another exception applies).

Further, if you receive a distribution from an employer retirement plan, your employer must withhold 20% of the payment for taxes. This means that if you want to roll over your entire distribution, you'll need to come up with that extra 20% from your other funds (you'll be able to recover the withheld taxes when you file your tax return).

The direct rollover or transfer (Better option) The second type of rollover transaction occurs directly between the trustee or custodian of your old retirement plan, and the trustee or custodian of your new plan. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution. Trustee-to-trustee transfers avoid both the danger of missing the 60-day deadline and, for employer plans, the 20% withholding problem.

With employer retirement plans, a trustee-to-trustee transfer is usually referred to as a direct rollover. If you receive a distribution from your employer's plan that's eligible for rollover, your employer must give you the option of making a direct rollover to another employer plan or IRA.

A trustee-to-trustee transfer (direct rollover) is generally the safest, most efficient way to move retirement funds. Taking a distribution yourself and rolling it over makes sense only if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.

Comment   |  Flag   |  Apr 14, 2014 from Milwaukee, WI

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Hello Deborah,

We often use financial industry jargon like "rollover" and "transfer" interchangeably.

But what you're describing is technically a transfer from your current Roth IRA (and whatever it's invested in) to a new Roth IRA that will invest in CDs. Think of it as a transfer between two "boxes" (both Roth IRAs). The particular investment just happens to be what you choose to put in the box. In this case, the CD is what you're planning to put into the destination box (Roth IRA).

As Robert stated so well, it's best if you have the trustee of your current Roth IRA make a direct transfer to the trustee of your new Roth IRA (which will hold the CD).

One other thought . . . while there'll be no income or penalty taxes if you handle the transfer per above, IF you have your current Roth IRA invested in an annuity or mutual fund that still has a surrender charge, that's essentially paying a penalty to get out of the investment early. But it'd be a financial product penalty, not a tax penalty. And depending on what financial firm your current Roth IRA is with, it's not uncommon to have to pay both 2014's annual IRA administrative fee plus an IRA termination fee.

Hope that helps. All the best!

Comment   |  Flag   |  Apr 14, 2014 from Clackamas, OR

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Carolyn Taylor Level 15

This is an excellent question regarding the specifics of your Roth IRA, a little background on the features of Roth IRAs is important to understand first before making this decision. From a fundamental standpoint a Roth IRA is an excellent tool to save for retirement. This type of account is appropriate for a variety of individuals with key features outlined below:

• Allowed annual contributions of $5,500 in 2014, and if over age 50 an additional $1,000 catch up contribution. To contribute you must meet the income limits specified by the IRS, subject to change annually.

• No tax deduction in the year a contribution is made, contribution is completed with after tax dollars.

• Any earnings accrued to you during the life of the account can be withdrawn tax free during retirement.

• Withdrawals prior to age 59 ½ may be subject to taxes and a 10% penalty unless withdrawn for a qualified expense, for example: first time home purchase.

• No mandatory distribution requirement at age 70 ½. If you do not need the funds during retirement they can remain invested, continue to grow, and pass to heirs.

This account can be valuable for individuals who plan to save annually, with adjusted gross income below the income limitations, and want to minimize taxes during retirement. Additionally, because there is no mandatory distribution, high net worth individuals have found Roth IRAs a useful vehicle to efficiently pass assets to charity or their heirs tax-free.

A Roth CD is simply a certificate of deposit that is housed within a Roth IRA. There is no penalty when consolidating Roth IRAs in the name of the same individual. In this instance you would be choosing to purchase a certificate of deposit within your Roth IRA rather than other securities such as stocks, bonds, or mutual funds. A certificate of deposit is usually issued by a commercial bank, pays a fixed rate of interest, ranges in maturity from 1 month to 5 years, and is generally insured by the FDIC. A CD can have limited flexibility and low returns, and typically you cannot withdraw funds from a CD prior to maturity without incurring a penalty.

It is important to evaluate whether a certificate of deposit is the most appropriate investment given your long term goals, time horizon, and current financial situation prior to purchasing this asset in your Roth IRA. In general certificates of deposit tend to be a very conservative investment with low returns when compared to a balanced portfolio invested in stocks and bonds. Consulting a comprehensive wealth advisor or financial planner to establish a long term financial plan and ensure your assets are invested to achieve your goals is key to your overall financial health.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above

Comment   |  Flag   |  Aug 14, 2014

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