Dedicated to Deposits: Deals, Data, and Discussion

Update on Early Withdrawals from PenFed IRA CDs

POSTED ON BY

Pentagon Federal Credit Union

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.

  Tags: New York, North Carolina, Hawaii, Texas, Virginia, Pentagon Federal Credit Union, CD rates, Maryland, IRA rates

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Comments
12 comments.
Comment #1 by Anonymous posted on
Anonymous
Add this to another case of the CSR not being properly trained. 

6
Comment #2 by bbug posted on
bbug
I removed all but $1000 from my seven year CD and transferred it to a higher yield seven year CD at Pen Fed on December 28. And Pen Fed even called me and asked if I wanted to transfer the remaining $1000 penalty free. I did. I'm over 70 1/2. Perhaps that makes a difference.

7
Comment #3 by OAG posted on
OAG
The dividing line appears to be 1 Sep 2007. Wonder how a CD opened in 2006 then rolled over in 2013 (roll overs keep the same CD number) is impacted? Personally we consolidated several IRA CD's in 2006 whereby we closed completely several lower rate CD's into single higher rate CD's. We did this via a single CSR phone call. I guess times change.

5
Comment #4 by scottj posted on
scottj
I don't fault Penfed on this change, Taking money out of a certificate just to get a better rate is really not what partial withdrawal was meant for  

12
Comment #5 by Anonymous posted on
Anonymous
What is the definition of a "Partial Withdraw"?
I believe Penfed needs to clarify this!

4
Comment #7 by Anonymous posted on
Anonymous
I'm with you on that one, scotti.

PenFed, along with other CUs and banks have to maintain some resemblance of financial order.  A lot of people have lost sight of what was the original intention of Certificates of Deposit with a guaranteed interest rate for a specific period of time.

6
Comment #8 by bbug posted on
bbug
I would submit that Pen Fed partial withdrawals are meant to be at the discretion of the depositor. If they were meant for something specific, that would have been spelled out. Other institutions might make exceptions for certain withdrawals like purchasing a home and those exceptions are what partial withdrawals are meant for at those institutions. In other words, what they are meant for is what each institution specifies.

3
Comment #6 by Anonymous posted on
Anonymous
So a 59.5+ person can make a penalty-free partial withdrawal and re-invest into a higher yield IRA CD elsewhere, but would incur a penalty if they wanted to re-invest the funds at PenFed?

13
Comment #9 by Anonymous posted on
Anonymous
Not sure about that, when you make that penalty-free partial withdrawal from your IRA at 59.5 it would be treated as IRA distribution and then reported to the IRS and taxed accordingly.

5
Comment #10 by Anonymous posted on
Anonymous
Not if it were directly rolled over into an IRA at a different institution.

6
Comment #11 by Anonymous posted on
Anonymous
Or rolled it over into another IRA at a different institution within 60 days of personally  receiving the withdrawal.

5
Comment #12 by Anonymous posted on
Anonymous
I asked a rep if I took an allowed distribution could I then open a new IRA CD?Answer was yes
without a penalty.It will be a distribution,but rolling it over within 60 days avoids a tax.

4
Comment #20 by Ally posted on
Ally
An allowed distribution (RMD) cannot be reinvested into an IRA. A rollover has to be reported on the first page of your tax form. All withdrawals, rollovers etc are reported on a tax form sent to you in Jan. The institution puts the code in the box concerning what type of distribution it was. 

2
Comment #24 by Anonymous posted on
Anonymous
A rollover ''trustee to trustee'' transfer of the IRA is not a taxable event and is not reported or need be reported on your tax form.

4
Comment #13 by Ally posted on
Ally
Prior to Sept 1 2007 members over age 59 1/2 could just call Pen Fed up and they would transfer or close an IRA CD and you could get a higher rate CD. As of Sept 1 2007 this was no longer an option. The policy notification states that a penalty will be imposed for premature IRA certificate redemption regardless of age, unless redeemed as a required minimum distribution. Pentagon Federal will grandfather existing IRA certificates until maturity. Members may redeem each grandfathered IRA certificate one time without penalty. Any IRA certificate opened or rolled over after Sept 1 2007 will be subject to the new policy. 
(I think that up until now you could transfer out and leave $1000 in an existing CD and not have to pay the penalty. )
I KEPT THE ENCLOSURE

3
Comment #14 by lou posted on
lou
Ally, I had trouble understanding your post. My understanding is that you can  make partial withdrawals from your IRA CD without penalty as long as you're 591/2  and you keep $1,000 in the certificate. However, you cannot use those proceeds to purchase a Penfed IRA certificate that has a higher rate.  Are you disputing this interpretation of the current rules?

3
Comment #19 by Ally posted on
Ally
I am saying that prior to Sept 1 2007 we could just call up Pen Fed if the rates were higher and they would give the CD the higher rate and we could choose the number of years we wanted the CD to have. This was allowed ONCE a year. During this time the highest rate  was for 5 & 7 years. In the July 2007 statement  the insert  states--

 "Effective September 1, 2007, members over 59 1/2 will no longer be permitted to prematurely redeem IRA certificates without penalty."

"A penalty will be imposed for premature IRA certificate redemption regardless of age, unless redeemed as a required minimum distribution."

"Pentagon Federal will grandfather existing IRA certificates until maturity. Members may redeem each grandfathered IRA certificate one time without penalty. 

Any IRA certificate opened or rolled over after September 1, 2007, will her subject to the new policy. 

I have in the past  transferred (trustee to trustee) money for higher rates from IRA CD's with no penalty from IRA CD's purchased after this time leaving at least $1000 in that CD. The CSR told me to leave a $1000 or more in the CD and not close it because that would trigger a penalty.  

3
Comment #44 by Anonymous posted on
Anonymous
Where exactly (what page) of the current IRA booklet is the Sept. 2007 rule mentioned ?

1
Comment #45 by Anonymous posted on
Anonymous
It was 3 1/2 by 6 1/2 dark yellow insert stuffed in with  the newsletter with the mailed statements. I just stapled it with the statement and used a clip to attach it to the back of the file folder of my statements. It was not in the current disclosure. It was mailed with the volume 44 number 7  newsletter. It was not in the disclosure.  It was an insert and it said in big letters IMPORTANT IRA POLICY NOTIFICATION.

1
Comment #46 by Anonymous posted on
Anonymous
How tacky.  If it's not in the disclosure I would question it's legality.

1
Comment #47 by Ally posted on
Ally
At the time it really didn't matter  because rates were on the way down. I believe if it was put in their newsletter people would have missed it. The bright yellow insert got the attention of everyone.  I know my last 7 years CD's have matured or will be maturing this year. The rates never got over the peak of 6.5 or so when this was written. All the existing CD's were grandfathered and we could do it one more time before maturity for going forward this benefit would no longer be available. I think they did it right.  Pen Fed has been a very good place to do business with. They are very accommodating. I have benefited doing business with them. As a rule they are tops or near the top for rates. I think we will see higher rates as more of the 6 and 6.5% CD mature so that they can keep the money there. They have a good credit card. Great loans for those that need an auto or HE loan. Very easy to work with. My son was on tour in Europe in South Africa, London, the Netherlands, Ireland, Greece, Rome etc and they worked with him for his HE. My 68 year old friend gutted her downstairs and they worked with her for a HE loan. No fees of any kinds. Her daughter ran the mtg dept at Comerica and before she moved to Texas with them she came and looked it over and actually applied for it on the internet for her.
She couldn't believe the rates with no fees. They are amazing. Their true car.com site worked very good for me and the local dealer matched the deal that they quoted plus threw in a few extras. The deal was about 700 dollars cheaper plus the extra they threw in than the summer before when the new models were coming out. So I was able to get a newer model for less money. 
I am reading a lot of the dismay people are having with PenFed and I think that with all the new employees the CRS's  are "winging" it rather that getting supervisor help for things they don't understand. That is to Pen Fed's detriment. I hope they are following this thread. 

1
Comment #48 by Anonymous posted on
Anonymous
We both know Penfed isn't following this thread!  Get real.  Yes, the new CSRs are "winging" it.  Imo, Penfed's knowledge of the CSRs giving out the wrong info is highly unethical (and maybe criminal).

1
Comment #51 by Anonymous posted on
Anonymous
I know that two of my other credit unions follow deposit accounts. One of them has actually answered a complaint on this tread.  I believe on of the banks did also. They answered a thread but not sure it was this one. Maybe Ken has that info. 

1
Comment #53 by Anonymous posted on
Anonymous
I have to say that I have no tolerance for misinformation  when it comes to IRAs because IRA mistakes bring in the IRS. The phone and branch people here have various levels of knowledge on this(IRAs) which is unsettling. Penfed is not the only institution with this problem, but that is no excuse. A branch person gave me the expert(s) phone number at a main branch who seemed annoyed that I was calling her but did know the answers. When it comes to IRAs ---- A higher trained group of (dedicated to IRAs) people should be in charge of handing these issues and  accounts. After all, they are large enough to support a unit like this.

2
Comment #15 by harrysit posted on
harrysit
Don't say you want to reinvest into a new certificate. Just request the partial withdrawal and put the money in the IRA share account. Once there, you can do whatever you want.

4
Comment #16 by lou posted on
lou
harrysit, I agree that should be doable but it could be risky. If they don't allow you to use the funds in the share account to purchase the higher-rate certificate, then what do you do with the money. You won't be able to reinvest in the certificate you just took the funds from.

4
Comment #17 by niniss posted on
niniss
Hi - Does anyone know the routing number for PenFed?  I'm trying to set up ACH between Penfed and my other bank, but couldn't find it on their website.  Thanks in advance for your help.  

2
Comment #18 by pearlbrown posted on
pearlbrown
According to the PenFed website, the routing number is ABA Routing # 2560-7844-6.  It's at the very bottom of their home page on the right, above the Equal Housing Lender symbol.

7
Comment #21 by niniss posted on
niniss
Thanks Pearl!  I googled and got the number afterwards but wasn't sure how accurate it was (some banks have different routing numbers for different regions so I wasn't sure). 

3
Comment #22 by niniss posted on
niniss
Pearl - While we're at it, do you know for sure that it's free to initiate ACHs (in or out) from PenFed? 

2
Comment #28 by Anonymous posted on
Anonymous
I'm sure it's free.

1
Comment #31 by niniss posted on
niniss
Thank you!

2
Comment #23 by Anonymous posted on
Anonymous
It appears that no one knows for sure what EWP policy applies to IRAs for those over 59.5.  This CU is becoming just like the mega banks.

9
Comment #25 by scottj posted on
scottj
Show me a mega bank offering 5 year 3.04% CDs? Looks like Penfed had a pretty liberal policy on IRA accounts, then people started gaming them by using it to get money out just open new higher rate CDs with them. Now Penfed is closing that loophole 

7
Comment #26 by Anonymous posted on
Anonymous
some people are never happy

6
Comment #29 by Anonymous posted on
Anonymous
@26,

You must mean people like scottj's brother. scott posted that he helped his brother swap a lower yield PenFed CD to the 3% one.

7
Comment #30 by Anonymous posted on
Anonymous
I remember seeing the posting by scottj.  He seemed to be bragging quite a lot.  Gotta you scottj!!!

5
Comment #32 by scottj posted on
scottj
Got me on what? His was not an IRA CD, He paid a $1,875 penalty  to get the 5 year CD. That is very different than just taking money from a current CD penalty free just to get a higher rate. I thought the point of allowing partial withdrawals on CDs was to give you some income to live on, not chase higher rates 

3
Comment #37 by Anonymous posted on
Anonymous
What difference does it make if the partial withdrawal is for food, a flat screen TV, a fancy car, or a new CD? Who are you to judge? PenFed doesn't list any restrictions as other posters have said.

5
Comment #27 by Anonymous posted on
Anonymous
Why is that called gaming? There are no restrictions on what one can do with the money after withdrawal. And PenFed is still allowing it, they're just imposing a penalty on it.

11
Comment #55 by Ally posted on
Ally
Pen Fed closed the policy in 2007. Up to that time they told us we could do it. It was at their encouragement that we did it. 

1
Comment #52 by Anonymous posted on
Anonymous
I believe the confusion starts because it depends WHEN you opened your CD or IRA CD. Different rules for different times you CD was opened.  Not sure customers are getting wrong information (but maybe they are) but the rules apply to when you opened your CD.

1
Comment #33 by Anonymous posted on
Anonymous
I talked to 2 CSRs. First one said anything over RMD will get penalty. Second one said first one was completely wrong and there is no penalty for partial withdrawal from IRA (over 59.5) and that the only restrictions come into play if you want to use that money to reinvest in higher rate CD at Penfed but the partial withdrawal itself will have NO penalty. He then implied reinvestment in IRA CD has more of a taxable-event restriction than real imposition of restrictions from Penfed or that Penfed meant its restrictions as implied by IRS for rollover (since withdrawal would be taxable event and then opening CD with outside funds is also a taxable event).

Ken's article above supports the viewpoint of the second CSR and so do their rules explicitly stated in the IRA Application Booklet, quoted in the article above. The rules do NOT mention RMD at all and are very explicit that with 1k remaining balance there is NO penalty for partial withdrawals.

So, while some CSRs seem to give wrong info and CSRs do give out different info, the written rules are clear and support partial withdrawals if you leave 1k in IRA CD.

1
Comment #34 by paoli2 posted on
paoli2
Why is it, from #33's post, I get the impression that so many excuse CSRs for giving us wrong information?  I think this is the reason the credit unions allow these people to do these jobs.  When I found out recently I was told exactly wrong info about how to do something on my CD, it was excused by Penfed as "it must have been one of our newer reps and she did not fully understand the rules for this".  They are not selling us bags of potatoes but dealing with a lot of our money.  I think for the amounts many entrust to that credit union, we deserve to have CSRs who are trained to understand how to do their jobs or at least how to "read" the correct info from their own Disclosure booklets and explain it correctly to customers.  To excuse their misinformation is to encourage more of the same.

3
Comment #35 by Anonymous posted on
Anonymous
I think CSRs are probably good enough for run-of-the-mill stuff but harder stuff requires more competent folks, and such folks would move up from CSR positions to some other ones... So, when CSRs answer more complex questions, it's understandable they cannot be trusted always... - Anon #33

2
Comment #36 by Anonymous posted on
Anonymous
I have run into the same problems with local branches.  CSRs whether on-line or in-person are not properly trained.  I recently ask a bank branch manager of 30 years to explain the EWP.  He couldn't.  He did pursue it thru the saving dept.  It took him ONE week to get an answer.

3
Comment #38 by Anonymous posted on
Anonymous
If your over 59 and a half can you still do a penalty free withdrawl in an IRA as long as you don't reinvest with PenFed ??

1
Comment #39 by Anonymous posted on
Anonymous
It depends on which PenFed CSR you speak with!

5
Comment #40 by Anonymous posted on
Anonymous
As long as you leave a minimum of $1000 in the IRA CD.  All the details are in the disclosures.

2
Comment #50 by Anonymous posted on
Anonymous
You can do transfers "trustee to trustee" but if you do a rollover you can do it only once a year with the same money and has to be done within in 60 days. 

1
Comment #54 by Ally posted on
Ally
And with an inherited IRA only a trustee to trustee can be used. Do not under any circumstance touch that check or have it sent to you.

1
Comment #41 by Anonymous posted on
Anonymous
I disclaimed my husband's IRA's with Pen Fed so that the children would inherit them. The children had their first RMD as a beneficiary in Dec. Pen Fed took out all of the required RMD from the CD with the lowest interest. 

2
Comment #42 by paoli2 posted on
paoli2
#41 Do I understand you that even if the family members inherit the IRAs and are not yet 70 1/2 they have to continue the RMDs started by the original owner?  I thought this was the way it was but wasn't quite sure.  Thanks.

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Comment #43 by Anonymous posted on
Anonymous
Not necessarily, for IRA’s that had already started RMD and the beneficiary is not the spouse the beneficiary’s RMD is determined based on either the beneficiary’s single life or the IRA owner’s life, whichever is longer.    For example, if you’re already taking RMDs from your IRA and your daughter inherits the IRA, her RMD will be recalculated based on her life expectancy.

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Comment #49 by Anonymous posted on
Anonymous
Publication 590--You can order it or go to IRS.gov and read it. 

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