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Do Any Banks Offer Inherited Traditional IRA's Where Interest Can Be Withdrawn?

John Sears
John Sears   |     |   51 posts since 2015

My late Dad set up IRA's for me and my brother, I got in on a 5 year CD with Ally Bank with a 2 mo. EWP.  However, I am only able to take out the RMD each year (about $5K) and not the accrued interest as that is considered breaking the terms.

The CD will be ending soon, and I'm curious if all banks operate this way.  The availability of the extra interest would be beneficial.

RickZ   |     |   15 posts since 2010
I believe that all banks allow you to elect to have interest taken out of a CD monthly as it accrues rather than compounding it. As to the issue of accrued interest that has been added back to the CD principal, I think that banks vary in whether or not they allow you take out this accrued interest without penalty.  I don’t see why any of these rules would be different for CD in a regular account versus one in an IRA account but it’s possible a bank could have different rules for each.  

If you decide to open a new CD when this one matures, then Ally (or another bank) should allow you to elect to have monthly interest paid out rather than be compounded. That way you could open a savings account within the inherited IRA and have the monthly interest deposited to that account.  Then you could take out the funds from the savings account as you wish.  I would think that the distribution of funds from the savings account should not affect the exclusion from an early withdrawal penalty that the bank gives for the RMD itself but I could be wrong so you need to check with the bank about this (maybe best to take the RMD from the CD first). Alternatively, when the CD matures you are free to take out all or as much of principal as you want and invest those funds in a regular CD (the RMD is only a required minimum). The big caveat to either of these strategies is that you will of course have to pay income tax on all amounts that you take out of the inherited IRA while all funds left in the inherited IRA would continue to accrue interest tax free until distributed out.  The stretch IRA rules for inherited accounts are a big benefit from a tax standpoint and you would be losing part of that benefit if you took out more than the RMD.  
John Sears
John Sears   |     |   51 posts since 2015
I think the Inherited Traditional IRA is a tricky one and 6 years ago fewer banks were offering it.  Things may have changed all around with them in that I will now be able to get at the interest yearly.  Thanks very much.
me1004   |     |   536 posts since 2010
I don't know about rules specific to inherited IRAs, but non-IRA accounts have varying rules from bank to bank. Some allow you to withdraw even interest already posted back into the account, some allow you to take that interest only at time of payout, and some don't allow you to take it until the CD mautres. Some even post no interest until maturity, just pay simple interest with no  compounding, so there is no question about being able to take it out over the course of the term.

Whether there are differences in IRAs or not, I would suggest you should look at the disclosures to see what they say about it. That is where you will get your definitive answer.

But I also note, seems to me a year or two ago, they changed the rules for inherited IRAs, limiting them to continue as an IRA for no more than five years after death/inheritance. If you were in a 5-year  CD, you might not be able to keep that money in an IRA when it matures, so your question might prove moot. Clearly, you should check into that rather than get caught by surprise when you try to take a new CD.
John Sears
John Sears   |     |   51 posts since 2015
Although many people speak highly of Credit Unions, and although I have never dealt with them, it does seem to me on reading here that they seem to have more clauses.  Then again, Bank of Indiana just raised their 5 year rate to 2.27% and they have a 1 year EWP, so does CITBank, and EBank is a whopping 2 years. 
Ricochet   |     |   220 posts since 2010
Choose wisely grasshopper $