CDs in IRAs and interest withdrawal penalties
I have a client who used to work for a bank. He swears that there is a long-standing law forbidding banks from charging penalties for withdrawing a CD before maturity [b]if it is in an IRA[/b]. But of course I have no legal code to refer to.
So he wants to go into long dated CDs for higher interest and then feels he can pivot out of them before the term is up if he wants to without losing the interest to that point.
This doesn’t seem right or likely to me.
Can anyone shed light on this? Heard of it? Or something similar?
Thanks for any response-
Permalink Submitted by charles lore on Tue, 2008-11-18 00:51
Just an educated guess with no facts to back it up but I would think just the rmd portion would escape penalty.
Permalink Submitted by Jose Morales on Tue, 2008-11-18 01:02
There is no Federal or State law or regulation that requires a financial institution to waive any early termination penalty on an IRA account once the individual reaches the age of 70 1/2 or 59 1/2. I threw in the 59 1/2 because this mythical law that is often spoken of is often used by those over 59 1/2 as well when they are looking for a way to escape an early termination penalty. Financial institutions are not even under any requirement to waive an interest penalty for an RMD. If they do so it is completely out of their own generosity.
This is one of many “IRA Myths/Misconceptions” that I frequently have to address. No matter how much resistance I get when I explain this I have yet to have anyone show me this law or regulation. It does not exist. If it did then we would have people doing exactly what was referred to in the first post, opening IRAs in CDs at the highest rate and then simply closing and renewing every time the interest rate went up on CDs. It would be a major headache.
Permalink Submitted by Janine Janine on Tue, 2008-11-18 03:52
There may not be a law that [b]requires[/b] a bank to waive the penalty on an early withdrawal of a CD IRA for an owner over 59 1/2, but a bank did exactly that for me and also for my brother. Perhaps it depends on the philosophy of the particular bank.
Permalink Submitted by Jose Morales on Tue, 2008-11-18 04:10
I am sure it had less to do with the philosophy of the bank and more to do with the ignorance of the person processing the distribution of both the bank’s policies and IRS regulations. Before we took away the ability for our offices to process their own IRA distributions they would waive every interest penalty regardless of the owners age.
Permalink Submitted by William Tuttle on Tue, 2008-11-18 04:46
This used to be a common feature of CDs issued in IRA accounts. In fact, I remember many banks making a specific point of this in their marketing to attract IRA deposits. They also used to offer higher interest rates in IRAs of the exact same maturities (they realized most people would automatically roll them over).
However, for whatever reason banks have been eliminating both of these benefits. First, most banks no longer offer separate IRA CD products. Once they started doing that, first the beneficial rates went away and then the ability to satisfy RMDs without penalty.
If there was any law or regulation about this, it was “allowing” the banks to waive the penalty in this case.
Permalink Submitted by Jose Morales on Tue, 2008-11-18 04:59
No law or regulation needed to be passed to allow a bank to charge an interest penalty when someone breaks the term of a CD IRA. When you choose what you want to invest your IRA money into you agree to all of that investments terms and conditions.