- As long as the money remains in the IRA, whether it is a traditional IRA or a Roth IRA, the CD grows tax free because IRAs are tax-sheltered accounts.
- When the money is removed from the traditional IRA at retirement, the money, including interest on the CD, is counted as taxable income because a traditional IRA is a tax-deferred account.
- Roth IRAs are different from traditional IRAs because you do not get to take a tax deduction for your contribution to the account but also do not have to include the withdrawals at retirement as part of your income. Therefore, the interest from a CD in a Roth IRA will never be subject to income taxes.
- Because the money in an IRA is tax-sheltered, it allows the money to compound more quickly because all of the interest can be reinvested unlike a regular CD where some of the interest is paid to the government in taxes.
- Money in an IRA cannot be accessed until you reach age 59 1/2 without paying a 10 percent early withdrawal penalty unless you have one of a limited number of special circumstances like a permanent disability. Therefore, you should only put money you do not expect to need until retirement.
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