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What Choices Do I Have When My Roth IRA CD Matures?

What Choices Do I Have When My Roth IRA CD Matures?

Financial accounts designated as Roth IRAs can invest in any number of different types of financial vehicles from stocks to bonds to certificates of deposit. When a CD matures inside of a Roth IRA those funds can be used in any number of different ways and are not limited to just the CD that was originally purchased.

The one primary benefit of a Roth IRA is the fact that returns gained in the account over the years accumulate tax free and once withdrawals start at 59 1/2 those disbursements are not taxed as ordinary income. Because of this tax benefit it is best to maximize the return in a Roth IRA as much as possible by choosing investments with an appropriate level of risk for the investor that yield the highest return.

When a Roth IRA CD matures, depending on the age of the investor, it might be time to look at some other investments which could possibly yield higher returns than what the certificate of deposit was paying. Since funds in a Roth IRA can be invested in a wide variety of resources, it might be the time to look at mutual funds, individual stocks, bonds and money market mutual accounts.

Since Certificates of Deposit normally pay a percentage rate slightly above that of inflation, CDs normally aren't the best use of resources in an Individual Retirement Account. The entire purpose of an IRA is to grow tax free for use later in life to provide financial security. If individual stocks are too risky and certificates of deposit have below nominal returns then something in the middle might be more appropriate.

Investing the proceeds from a Roth IRA CD in a stock mutual fund will normally result in above average returns with minimal risk due to the diversification offered from a mutual fund and professional investment management. Because a variety of different types of investments can be purchased under an Individual Retirement Account it might be appropriate to speak with an investment adviser to determine your level of risk and find an investment in line with your long-term goals.

One of the disadvantages of continuing to purchase CDs in a Roth IRA, outside of the lower than average returns, is that certificates of deposit in general often have penalties for early cancellation. If those same funds are used to purchase stocks or mutual fund shares, they can be liquidated with no penalty and withdrawn from the Roth IRA if necessary. If the disbursement qualifies for one of the many exemptions such as the first time purchase of a home or qualified medical expenses then the money could be withdrawn without the 10% penalty and earned income taxes.

Even if the funds were to be used for higher education or medical expenses, the certificate of deposit would still need to be sold a penalty incurred even if it is inside of a Roth IRA. So in reality it is not a very good idea to own a certificate of deposit in an individual retirement account as there are too many drawbacks with not enough return.

The long-term time horizon of individual retirement accounts make it more appropriate to invest in riskier assets such as stocks and bonds that will offer better returns than certificates of deposit. When interest rates are low, returns on CDs are also low and years can pass with the IRA growing little. Making Roth IRA funds work for you and invest wisely is the key to a healthy and happy financial future. If unsure of what to invest in when a Roth IRA CD matures, consult with an investment financial adviser or other professional to determine the options that work for you.

Image by: Jeremy Brooks