IRA in CD’s
I have a potential client who has his Mom’s IRA with $500,000 in CD’s. If his Mom passes away, do banks give the option to stretch the IRA?
Thank you,
Douglas
I have a potential client who has his Mom’s IRA with $500,000 in CD’s. If his Mom passes away, do banks give the option to stretch the IRA?
Thank you,
Douglas
Permalink Submitted by Alan Spross on Thu, 2007-08-30 05:13
They do, but the non spouse beneficiary may have to make a timely election to avoid the 5 year rule if his Mom passes prior to her RBD.
Another issue is whether the bank has a policy of waiving CD early withdrawal penalties either one time due to owner’s death, or for each year thereafter to the extent of the RMD requirement. The client should check with the bank on these issues, as the benefits of a CD are compromised if the beneficiary is charged early withdrawal in order to meet his RMD. The bank may be able to help him structure the IRA(s) to avoid this problem, or if they are not helpful he can always wait for the CDs to mature and then directly transfer the balance to another custodian. Of course, he cannot do a rollover, so must be aware that taking possession of the funds amounts to a permanent taxable event with no recourse.
Permalink Submitted by Janine Janine on Thu, 2007-08-30 17:38
Why can’t the client convert the Bank IRA CD to an Inherited Bank IRA CD just as you can convert a Fidelity or Vanguard (and others) IRA to an Inherited IRA and follow the RMD stretch rules? Or better yet, the beneficiary should make a direct transfer as an Inherited IRA to another institution. And it does not seem ethical if the bank does not waive early withdrawal penalties in the case of death!
I would think that all the above would suggest that it behooves one not to have his/her IRA in a Bank CD. I am happy to say that a few years ago I removed any of my IRA’s from the safety of Bank CD’s.
Janine
Permalink Submitted by Alan Spross on Thu, 2007-08-30 23:18
The client may be able to do just as you indicated if the bank does not have administrative roadblocks in the way. The IRS does not care as long as they get RMD taxable income per Sec 401a(9).
While a bank CD may be appropriate for certain IRA owners because they sleep better at night that way, you are correct that the beneficiary potentially faces problems both with portability of the assets and early withdrawal penalties linked to the CD as opposed to IRS penalties. In addition, some of these restraints might be spelled out in the IRA agreement, and some may not.
Permalink Submitted by Alvin Young on Mon, 2007-09-03 14:00
Pentagon Federal Credit Union allows those over some age (70.5?) to take RMDs from CDs w/o penalty. They also allow the stretch IRA for beneficiaries. I do not know if they allow younger beneficiaries to take
RMDs from a CD w/o penalty though…..it is possible that they might.