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Useful IRA CD Feature at Pentagon Federal Credit Union


Pentagon Federal Credit Union used to allow members over 59½ to make an early redemption of their IRA certificates without penalties. For new IRA CDs, this ended in 2007. However, a reader brought to my attention a feature that's almost as good as this. Here's what is described on the page 18 of PenFed's April 2009 IRA disclosure:

g. Exceptions. The penalties described above will not be applied if the withdrawal is made:
(i) Subsequent to the death of any holder of the Certificate.
(ii) As a result of the voluntary or involuntary liquidation of the credit union.
(iii) If the owner is permanently disabled, as defined in the Internal Revenue Code Section 72(m).
(iv) If the owner has reached age 59½ and takes a partial withdrawal.

I highlighted the unique exception. I also confirmed this with a PenFed representative. Here is what he stated:

On certificates issued after September 2007, if you're 59 1/2 or older and you only take a partial withdrawal that doesn't bring the certificate below $1,000, there is no penalty. Redemption triggers the early withdrawal penalty for any IRA certificate issued after September 2007.

So if you open their 4.00% APY 7-year IRA CD with $20,000, and then after 2 years, interest rates shoot up. You should be able to withdraw $19,000 plus accrued interest without the early withdrawal penalty (assuming you're 59½ or over). This is a major feature especially for the 7-year CD which has an early withdrawal penalty that equals 365 days of interest (or all interest if redeemed within 365 days).

PenFed often changes their CD rates at the start of each month, so this 4% APY 7-year CD may not last much longer.

Please refer to my last PenFed review for more details of PenFed CDs, IRA CDs and membership. People in any state can qualify via an association membership. The association membership and credit union membership can be done online.

PenFed is one of the largest credit unions in the US with $13.4 billion in assets and 889,874 members. It's federally insured by the NCUA (Charter # 227).

Thanks to the reader who emailed me info on this feature.
Related Pages: CD rates, IRA rates

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Anonymous   |     |   Comment #1
I have been with Pentagon FCU several years and am very happy with the customer service and their low certificate fees.
Anonymous   |     |   Comment #2
Yes, Pentagon FCU is one of the best. I have been a member for several years now and holding a few very high rate long term CDs (compared to current market rates).
I first learned about PenFed on this site, thanks to Banking Guy.
Anonymous   |     |   Comment #3
Has anyone checked to find out if Pentagon Credit Union would consider this a draw on your pension would consider this a taxable event?
Anonymous   |     |   Comment #4
Any withdrawal from an IRA is a taxable event whether there is an early withdrawal penalty from Pentagon or not. This is only in reference to whether Pentagon will assess an early withdrawal penalty on the CD or not.
The IRS will still require you to pay regular income taxes on the amount withdrawn.
Anonymous   |     |   Comment #5
The credit union does not make that determination, the IRS does.
And yes, any withdrawal for an IRA account whether it be from a CD, mutual fund, etc. within in an IRA is taxable. Unless of course it was a Roth IRA account.
Anonymous   |     |   Comment #6
Someone posted (post of 10:37 AM)while I was typing my reply. Didn't mean to post again what someone had already stated.
Bozo   |     |   Comment #7
To: All
Re: Normal Distributions from IRA CDs

I think I mentioned this feature some time ago, but I'm glad someone else noted it.

State Farm Bank also offers normals at 59 1/2 w/o penalty.

Most institutions, it appears, cling to 70 1/2.

I've done several normals with SFB. Usually get a check in a week to ten days. Never a problem. Your CD rate stays fixed even if you dip below the inception amount.

Bozo   |     |   Comment #8
PS: Regarding State Farm's IRA CD normal distributions

I always wanted to ask the folks at State Farm how many retirees actually use this feature. My guess is few.

In the interest of full disclosure, I wasn't even aware of it until I was advised of it by a State Farm CSR when my 2 yr IRA CD was coming due about a year ago.

Why State Farm doesn't market the heck out of this is beyond me. PenFed as well.

It's about the best money management tool for retirees I've encountered.

cwoldy   |     |   Comment #9
If I purchase a cd within my IRA and wish to move that IRA to another institution when rates rise,or move it within the same institution if their rates rise, I am assuming that this is not a taxable event. Is this correct? I would not be withdrawing any funds, but simply rolling from one IRA to another. This does not incur taxes, does it?
Anonymous   |     |   Comment #10
The IRS only accesses a penalty on an IRA if the withdrawal is not redeposited (rollover) with another IRA custodian (another bank) within 60 days.  You can rollover once per year, I believe, but I am not 100% sure about the limitation.
Dave   |     |   Comment #11
There seems to be some confusion about IRA "early withdrawal penalties." Potentially, there are two different types of penalty, each imposed by a different player:

1. Penalty for early redemption of a term investment. This is in accordance with the financial institution's internal policy, not because of IRS rules, and the financial institution keeps the penalty for itself as compensation for potential loss of income it could have earned had the investor honored the terms of the CD contract. As we all know, each financial institution sets its own rules for penalty amounts and terms. For personal income tax purposes, the Internal Revenue Code effectively treats the penalty as as reduction of interest to the investor. A  few institutions (e.g. Ally Bank) currently offer some no-penalty CDs even if not held inside IRAs.

2. Penalty for early distribution of a tax-favored investment. This penalty goes to the government, not to the financial institution. Congress enacted this penalty to discourage investors from taking distributions of employment or self-employment-related  earnings that they are allowed to accumulate without paying tax before reaching retirement age. IRS' penalty is 10% and most states impose their own penalties as well (e.g., CA has a 2.5% penalty). The penalties are in addition to regular federal (and usually also state) income taxes. If the investor has not yet reached age 59 1/2, this penalty may be avoided if the investor can meet one of the many exceptions available under Section 72(t) of the Internal Revenue Cde
Anonymous   |     |   Comment #12
Can you do a IRA transfer from penfed if you are 59 1/2 and avoid the penfed penalty?  In other words, if you have 100,000 in the CD, can you do an IRA transfer of 99,000 to another institution and avoid the PENFED early withdrawal penalty?