Bank of America IRA CD Early Withdrawal Issues
For those who have traditional IRAs, it's important to understand required minimum distributions (RMDs). According to IRS Publication 590:
If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.
RMDs can create potential issues for those with IRA CDs which have early withdrawal penalties. However, it's common for banks and credit unions to allow RMDs without early withdrawal penalties. For example, Alliant Credit Union has the following exceptions to the early withdrawal penalty:
Where the account is an individual retirement account (IRA) and any portion is paid within 7 days after the establishment of the IRA; or the account owner becomes disabled; or where the account is an IRA and the owner attains age 70½
This is also the case at Ally Bank as I described in my Ally Bank IRA review:
This penalty does not apply in the case of death, disability or legal incapacity of any owner, or, in the case of a required minimum distribution (RMD), you may withdraw the amount of the RMD without incurring an early withdrawal penalty.
Bank of America IRA CDs and RMD
Some banks don't make it as easy as Alliant or Ally to handle RMDs. As you might expect, Bank of America is one of them. A reader left the following comment in my post on Bank of America's early withdrawal penalty changes:
Bank of America is charging seniors a fee and penalty on there mandatory IRA withdrawal if you walk into a branch to do your business.. When your over 70 1/2 you must make yearly mandatory withdrawals from an IRA. If its in a 5 year IRA CD and you take the withdrawal they hit you with an early withdrawal fee and penalty. They get back most of the interest you made. The IRS requires you remove the funds.
I was not able to find the IRA CD policy details at Bank of America's website. So I called Bank of America at 888-827-1812 to better understand its IRA policies. According to two customer service reps, IRA CD owners who are at least 70½ can avoid an early withdrawal penalty, but they have to schedule the withdrawal in advance. I was told there's a form that can be filled out at a branch. This can also be done by phone. It must be done at least 3 business days before the withdrawal (one CSR said 5 days). The withdrawals can be set to repeat monthly, quarterly or yearly.
IRA CD Early Withdrawal Penalty for Owners 59½ to 70½
According to the Bank of America CSRs, there are no early withdrawal penalty exceptions for IRA CD owners between 59½ and 70½. Some banks and credit unions waive the EWP for IRA CD owners in this age range. One example is Pentagon Federal Credit Union (PenFed). According to PenFed's IRA form, the EWP will not be applied "If the owner has reached age 59½ and takes a partial withdrawal." I provided more details on this in my 2009 PenFed IRA CD review.
Do these fees apply to IRA Savings Withdrawals a well? (for Owners 59½ to 70½)
At age 58, I want to rollover my 401k into an Ally IRA Traditional CD. At the same time open an Ally IRA Savings to hold the IRA CD (interest or) balances at maturity.
At age 62, I would like to start monthly income distributions from the Ally IRA Savings to my Ally Non-IRA Checking to pay for retirement.
What, if any, fees or penalties will Ally charge for these transactions? I cannot find any info on their website and the CS people are no help.
Also, is the above plan to provide myself with retirement income a most financially typical one? How do retirees get income without fees?
If you are talking about using IRA money to withdraw and live on, you should not have to pay EWPs or penalties if you are over 59 1/2. However, you do know that any money you withdraw from an IRA has to be reported on your taxes at all times and you must pay taxes on the amounts. They are only protected from taxation while they are still in the IRA so, imo, read up on the rules in Pub 590 before you do what you plan on doing. I personally never touch a penny of any money in an IRA unless we have to for RMDs. IMO, it's more feasible to use whatever money you have in non-IRA accounts so one can take advantage of keeping the rest untaxed as long as possible. This is just my way of doing things so I hope you make the right decision as to what is best for you. I have never had to pay any penalties or fees for IRA funds. Best of luck on making the right decision.
When retiring before age 65, without Social Security, what do we live on if 90% of all retirement savings are in tax-defered accounts already? Not everyone can wait till 70 1/2.
Besides, there are no federal taxes on the first $18,000 of income when married filing jointly. Meaning I should be able to take $1500/mo in IRA distributions without paying tax. Also, I can earn a higher interest rate outside an IRA than what Ally or other banks are paying right now on IRA CDs. Am I overlooking something?
My question is: Do the fianancial institutions, like Ally, charge for shifting the $1500/mo from an IRA Savings account to a Non-IRA Chaecking account? I thought some banks do charge a fee.
Maybe that would make a good article for Ken. ;-)
From what I have been told, once we reach 59 1/2 we are allowed to withdraw needed funds from our IRAs without penalties from IRS or banks (unless your bank does not allow this and has it disclosed on the CD you purchase.). Whether Ally would charge you for shifting the funds the way you want to do is something I think you really need to ask a Director at the bank. It seems not all banks follow the same rules unless it is a Federal rule for IRAs. Why don't you email them so you can get their reply in writing? I would explain my situation to them, what I want to do, and ask them what if any fees or penalties would be charged. In the meantime, maybe Ken will pop in and give us his opinion.
However, if someone needs their interest to live on from an IRA CD, it must be put into the CD as part of the Disclosure and the interest can be electronically transferred monthly to the regular savings account we already have with the bank. BUT it must all be done at the time we purchase the IRA CD. He also said any interest we take out and put into the regular savings MUST be declared on our tax form and we must pay any taxes owed on it. We must also remember when calculating our RMD to add back in to the amount how much was taken out and transferred to the regular savings so that our RMD will be correct.
THIS is more complicated than what I prefer to do so that is why I have chosen my own easier way to do these things. One thing the manager made clear was what I tried to say earlier. Whatever is written in the Disclosure for your CD, whether it is an IRA or regular CD, they charge the same EWP if we break the CD before maturity. This is why BOA was able to do what they did and my bank manager said they would have done the same. The EWP is the same whether it is an IRA CD or regular. He said the fact that the gov does not penalize us for withdrawing IRA money after 59 1/2 does not mean we don't have to pay EWPs with banks. He felt that all banks follow their Disclosure rules.
So it would seem, you need to read the terms of your particular CD and find out what it says for EWPs to know what you would owe. If you want your interest to go into a seperate savings account, it can be done, from what I was told, but don't forget about it when RMD amounts have to be calculated. This must be what a lot of others do who need IRA interest to live on.
I was shocked to read that an institution (BoA) charged for withdrawing for MRD!!! Even more shocked that IRS thinks it's up to the institution!!! So one must find this out from the bank BEFORE depositing IRAs.
Oh, what a tangled web we weave.... lol! Rosedala
P.S. I wonder whether, if we get a flat tax (yeah sure!), IRAs would become easier to handle?
1. $322 penalty: Rosedala, Scott's $322 penalty was an EWP (early withdrawal penalty) incurred only because he closed the CDs prior to maturity. The $322 is separate from any fee he might have been charged to move the funds to another institution.
2. Fees for moving IRA funds: most institutions charge a fee for this, just as they do for other money movements. For example, you can move the IRA funds through a wire transfer to another institution and there will be a wire transfer fee.
3. The actual moving of IRA funds to another institution is a big issue which requires additional time, planning and careful forethought. IRS publication 590 is your friend and an excellent source of information. Here’s a Cliff’s note version based on my experience:
a) moving funds from one IRA account directly to another IRA account.
A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is tax-free because there is no distribution to you. That is, with a trustee-to-trustee transfer you never have possession of the funds and the funds pass from one IRA account directly to another IRA account. This of course means that the IRA account has to be set up at the receiving institution in advance of the move (here’s where time, planning and forethought come in). The sending institution reports the distribution to the IRS and you receive a form 1099-R. Box 7 of that form is coded to reflect the direct rollover of the distribution. That tells the IRS it is not income to you as the funds represent a direct rollover of a distribution to (among others) an IRA.
b) rollover of funds from one IRA account to another IRA account but not through a trustee-to-trustee transfer
If you choose this option, make sure to keep careful records showing amounts and dates received and keep a sharp eye on the calendar. You must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA. If you do not rollover the funds within a 60-day period, you do not qualify for tax-free rollover treatment and the funds are treated as a taxable distribution in the year distributed. You may also have to pay a 10% additional tax on early distributions. In addition, there are limits on when you can make another tax-free rollover of the distribution.
I have no experience with hardship distributions from retirement plans such as 401(k)s as mentioned by #16. However, I imagine there are many variables, such as whether the plan allows hardship distributions, the procedures an employee must follow to request a hardship distribution, the plan’s definition of a hardship and any limits on the amount and type of funds that can be distributed for a hardship from an employee’s accounts.
It is against the law for an institution to
a) penalize you for RMD from a certificate of deposit for early withdrawal of that RMD
--and if their IRA terms read that they will charge you an early withdrawal fee for an RMD from a certificate of deposit, then that term is also in violation of federal law
b) it is also against the law for an institution to charge you a "fee" for an RMD
2] This information was verified by FIDELITY INVESTMENTS, SCHWAB, PENTAGON CREDIT UNION, NAVY FEDERAL CREDIT UNION AND ANDREWS AIRFORCE BASE CREDIT UNION--all verified by their IRA departments (Not just their phone answering people or banking rep)
so---BofA may have terms, but they are in violation of federal law and thats that
From IRS Pub 590: You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 59½. After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions are not required until you reach age 70½.
In other words you MAY (emphasis mine) start taking RMDs as early as 59 ½ but you MUST (emphasis mine) start by April 1 of the year following the year in which you reach age 70½. April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date.
As Ken points out, BOA was clear that there are no early withdrawal penalty exceptions for IRA CD owners between 59½ and 70½. Their position may be that early withdrawals from CDs for RMDs are discretionary (ie: your choice), not mandatory, and thus not subject to an EWP exception.
Or of course, they may be pushing the envelope to make money now that the $5 debit card fee is dead. :D
Its kind of odd that there is plenty of information on the internet about what to do before retirement, but other than some IRS rules, there is little information on what actions retirees take during retirement itself.
Obviously, some of us CANNOT live soley on our IRA CD interest alone and must withdraw principal. At what point (at maturity?) can a portion of the IRA CD be removed? Where does one put these funds? Is there a charge for this?
When it comes to retirement planning many of these questions tend to go unanswered by young, ignorant bank personell. Is there a retirement school? What do old people do? Wing it?
What I did was select the bank or institution I wanted to use and if I had questions, get them to guide me. I found it easier to think of our IRAs as baskets to hold the financial selections we put in them. Frankly, I use CDs because it was easier for me to make decisions about them. You can also have a seperate savings account at the bank etc. of your choice where the IRA is and have them use it to collect any interest you make on your investments so you can use it for living expenses or let it accumulate to withdraw to pay your RMD when you become 70 1/2 and have to pay taxes on it.
When a CD (if you use them) matures, you can withdraw it but know that you have to disclose any distributions on your tax form and pay taxes on it. You can ladder CDs so that you have one of a needed amount maturing each year to use for living expenses. This way you owe no EWP and just have to pay taxes on the withdrawals. There has never been a charge for me to transfer or do a Rollover from one bank or institution to another especially when it is in the same city. Usually a fee may incur if you have to do a wire transfer to rollover an IRA from one account to another in a different city or bank.
Why would you want to move funds from one IRA account to another at the same bank unless you have IRAs for different family members? I think you may be misunderstanding how the IRA works. Once you set up your IRA in the name of the person who it is for, your main concern would be to decide what investments you want to put in it. Then you can change the investments at maturity (if CDs) or just transfer the IRA to another bank if you feel you can get better rates there. There is some good info in this forum from another poster about "Transferring" an IRA from one bank to another. You can never handle the check. Everything must be done by two institutions involved and forms must be filled out. Once you touch that check, the IRS considers it a distribution and you will have to pay taxes on it. This is why you need to be guided by the bank you deal with in these matters.
When a CD matures and you take the "distribution" for living expenses and declare it on your tax form, it is no longer considered part of the IRA (basket) and you can put it in another savings account to use. You can even put it in a savings account at a different bank but not in another IRA account. So this is why you should be sure you need the money before you withdraw it as a "distribution" from an IRA account and have to pay taxes on it. IMO, instead of trying to withdraw a "portion" of a CD which has EWPs on it, one would be better to keep CDs in smaller amounts to mature when needed.
It may sound complicated but once you get involved with it, it is easier than you think. You just have to be prepared to make certain decisions and make sure the money in the IRA is handled correctly by the bank with the choices you make. What we need is an IRA "How to Do" pamphlet but I cannot find one available.
On most things my standard approach is to 1) educate myself so I can better understand the issue and 2) seek assistance of a competent and trustworthy advisor so that I can make an informed decision. I am not a financial person by any stretch of the imagination but I am definitely motivated to learn. In this instance, that means 1) studying IRS pub 590 so I can understand the issue (how to use my hard-earned IRA resources to best advantage) and 2) seeking the advice of a competent and trustworthy accountant and tax professional as needed. Pub 590 http://www.irs.gov/publications/p590/index.html covers, among others, moving retirement plan assets, when you can (and when you must) withdraw or move them, what results in penalties and additional taxes, etc. It's informative reading even if quite dry and fairly soon it starts to make sense.
Again, I am not a financial person. However, based on my reading and understanding, the answer to your question "when can a portion of the IRA CD be removed?” needs to take into account two important factors. Here is some food for thought:
1) What type of IRA? Traditional and Roth IRAs have different rules and there are different tax implications to each. For simplicity, assume a traditional IRA.
a) you cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% tax on the amount not distributed as required.
b) money coming out of a traditional IRA and not returning to a traditional IRA becomes taxable income
c) you can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you are age 59½. After you reach age 59½, you can withdraw or use assets without having to pay the 10% additional tax.
d there are required minimum distributions (RMDs) associated with your total traditional IRA assets. You MAY start them as early as 59 ½ but you MUST start by April 1 of the year following the year in which you reach age 70½.
2) The funds are in a CD, which means that you have agreed to keep the money in the account for the specified term.
a) We know some institutions are more cooperative about allowing penalty-free required minimum distributions after a certain age than others, so the amount of the withdrawal may be an issue as well.
I hope this helps and best of luck to you.
Banks like BOA and Ally seem to have separate IRA accounts for both money market positions and CD positions. My question is basic: Can funds from a matured IRA CD be freely moved to a Money Market IRA or Savings IRA as easily as a brokerage IRA? Or, at BOA or Ally, are my only choices for a maturing IRA CD renewal or complete distribution?
If you decide to move the money elsewhere, remember that HOW you move the money is important (my post #17). I would talk to BOA or Ally, explain that I was not going to renew the CD, and make sure I understood how long I could leave the money in the IRA once the CD matured. Remember that just as with a regular CD that it is not going to earn further interest once it matures. If you already know where you are going to move the funds and have set up an IRA at that institution, you tell BOA or Ally you want to do a trustee-to-trustee transfer when the CD matures and let the two institutions handle it. This is method #1 in my post #17 above. You never take possession of the funds.
Scott #25 mentioned that when he moved his money he had to sign paperwork that he did not want taxes withheld and that he had 60 days to move the money into another IRA product. That is method #2.
The only thing that's different about moving IRA funds vs non-IRA funds is that it generally takes extra time and effort to do so. I have an IRA CD maturing in late March and will start planning 2-3 weeks before.
In order to avoid this penalty we had to make arrangements to have the MRD automatically distributed and deposited in our savings by the bank each year. Obviously we took this option. When these babies mature, we’re out of BOA and you can bet we will make sure the new bank does not charge these “penalties.” Still, in one rollover instance BOA messed up the paperwork so badly that the new bank had problems with it and I had to send verification to the IRS that I did indeed roll it over.
Thank you BOA!
I don't have first-hand knowledge of RMDs, but from reading the FAQs it appears that unless the bank you are taking the withdrawal from requires you to justify the amount, you don't have to show proof of the values and ownership of each IRA. The IRA owner is the one who is responsible for calculating the amount of the RMD, and if you want to take more than the RMD that should not be a problem.
Perhaps someone else on DA with more experience in this could confirm this. Also, it might be a good idea to ask the bank where you choose to take the withdrawal from about their documentation requirements, if any.
Please post back and let us know how it goes.
As for who is responsible. It is the IRA owner. The gov allows us to take everything due for all accounts out of just one if we want but I always keep a ledger and receipts for each account I took the money out for proof if needed. If you owe $30,000.00 for your RMD for example and you take it out of your brokerage account, just make sure you keep a copy of the check you received from them or I print what they put on the internet to show what they sent me for the RMDs. Your institutions should each year send you a statement showing what your account balance was at end of each year so this is how you make sure you are using correct amount to compute RMDs. Taking it all out of one account has always been much easier for me than to have to contact all IRA accounts for seperate checks. Just make sure your computations are correct and you can also verify them with your bank or brokerages.
It seems like a hassle but it really isn't once you know what you are doing and you keep good records for proof, imo.
Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.
Donuts, Inc. 401Ks Total RMDs $22,000.00
The purpose of the RMDs at 70 1/2 is so the gov can make sure they get us to pay taxes on the money. You would still be paying taxes on the same withdrawal so I cannot understand why they make it different for 401Ks.
If you figured your withdrawal from the correct total of ALL of the accounts, and got the correct RMD, it makes no sense to me why they make you do them seperately yet if you turned them into Rollover IRAs you could just give them one total RMD for all. I have never had to fool with 401K etc. but I tried to research it for you and it seems the rules are different. Maybe some other poster who uses 401Ks can tell us if the rules have changed lately.
I am sorry but I don't know how to make the link "blue" for easy clicking.
"According to the Bank of America CSRs, there are no early withdrawal penalty exceptions for IRA CD owners between 59½ and 70½. Some banks and credit unions waive the EWP for IRA CD owners in this age range. One example is Pentagon Federal Credit Union (PenFed). According to PenFed's IRA form, the EWP will not be applied "If the owner has reached age 59½ and takes a partial withdrawal." I provided more details on this in my 2009 PenFed IRA CD review"
This is ridiculous and against the law. I am planning to send a formal complaint against them to the Consumer Protection Bureau.
most local banks pay. Thanks