PenFed IRA certificates have some nice features, but a reader has recently found out that they’re not as nice as you might think. We have long known that PenFed allows penalty-free partial withdrawals of IRA CDs when the owner has reached 59 ½ . However, there are limitations on the partial withdrawals. First, here’s what is stated in PenFed’s IRA Application Booklet:
Partial withdrawals may be made, subject to early withdrawal penalties as described in paragraph (g) below, providing the requested withdrawal amount does not reduce the original issue below a minimum of $1,000 for 1-, 2-, 3-, 4-, 5-, or 7-year IRA Certificates, in which case the funds will be transferred to the IRA Share account.
Not only are partial withdrawals allowed, but there is no penalty "if the owner has reached age 59½ and takes a partial withdrawal." That is one of four early withdrawal penalty exceptions listed in paragraph (g).
It’s important to note that not all partial withdrawals are penalty free. Here’s what the reader reported (Thanks to the reader for reporting this):
I found out today PenFed no longer allows partial withdrawal from IRA for transfer to new rate CD without penalty per a Dec 17, 2013 memo to staff. You can still take a penalty free distribution after age 59 1/2 . I kinda thought it sounded too good to be true, and I called in on about Jan. 6 and asked. The CSR at that time thought you could do it. I filled out the form 735 and attached a letter telling what I wanted to do (along with my wife's IRA doing the same) and faxed it in. Today I got an e-mail telling me to call and the CSR told me of the policy change.
Last December a reader commented about how he was able to transfer money from his IRA CD into a new IRA CD with the new higher rate. This was allowed without a penalty since he was over 59 ½ and kept $1,000 in the original IRA CD. He reported that PenFed did this as a transfer and not as a normal distribution.
To confirm that the policy has changed, I emailed my PenFed contact who checked with PenFed’s IRA department. There appears not to be any official policy change. However, there had been confusion which may have caused PenFed reps to be lenient on allowing transfers. Here’s what my contact said:
There seems to be some confusion amongst folks that a partial withdrawal from an existing PenFed IRA certificate can be requested for the purpose of reinvesting in a higher interest rate certificate, and in so doing, an early redemption penalty can be avoided. For certificates opened after September 1, 2007, regardless of age (and the amount left in the original certificate), I’m told this is not the case:
If the member would like to use funds from an existing IRA certificate, with the purpose of re-investing the funds into a higher rate certificate, this request does not qualify as a withdrawal. This action would still be subject to a PenFed penalty. For the purpose of re-investing into a higher earning PenFed certificate prior to maturity, the member would need to close the certificate, with penalty, and then PenFed would open a new certificate.
So it appears what the reader did in December in which he was able to transfer money penalty-free from his IRA CD into a new IRA CD with a higher rate is no longer allowed. You should not view the IRA CD as a step-up CD in which the rate can be increased each time CD rates are increased.
For more information on PenFed and PenFed membership, please refer to my post, Four Important Points about PenFed’s CDs and IRA CDs.