Handling of CDs for Roth Conversion
I have a number of CDs within Traditional IRAs at a variety of banks and credit unions. I am considering converting my Traditional IRAs to Roth IRAs.
Is there any consistent policy of which you are aware as to how a bank or credit union will handle an existing CD when a Roth conversion occurs? Does the bank consider this an “early withdrawal” of the existing CD, requiring its penalty, and/or reissuing a new CD at its current (lesser) rate? Or, does the bank or credit union simply shift the existing CD unchanged from the Traditional IRA to a Roth IRA account?
Are there any established rules – or is it up to each individual bank or credit union?
Any experience?
Thanks.
Permalink Submitted by Alan Spross on Mon, 2010-01-04 19:49
No established rules, and therefore the policy of banks will probably differ on this issue. This is a question that should be asked of bank custodians before opening IRA CDs if conversions are to be considered.
With broker sold CDs that are sold in units of $1 each, it is easier to process conversions. I did one with Fidelity where I converted 33,000 units out of a 100,000 unit CD, and there was no selling, buying or penalties. The interest payments were simply split from the conversion day forward based on the number of units in each type of IRA.
In your case, with CUs and banks, you will probably have to ask each one individually how they will handle it. With current interest rates as they are, if there are any penalties, at least they would be lower now than in the future when rates rise.
Permalink Submitted by Jose Morales on Mon, 2010-01-04 21:46
This would be up to each financial institution, and most likely heavily influenced by the ability or limitations of whatever system they are using. At it’s most basic, a conversion is a distribution from a traditional IRA that is then rolled over to a Roth IRA. The distribution must result in a 1099R and the rollover must result in a 5498. This is where some systems would require a bank to process a withdrawal of funds from a traditional IRA and then deposit the funds into a seperate Roth IRA. Simply changing the account somehow from a Traditional IRA to a Roth IRA might not trigger their system to generate a 1099R and 5498 for the value of the account on the day of the switch. How a bank chooses to handle this would also be up to them, with regards to viewing it as a withdrawal that would result in an interest penalty or setting up Roth account that would mirror the Traditional IRA (rate, maturity date…) and being happy the funds will be staying at their financial institution.