EWP Free Distributions From IRA Cds For Folks Over 70 Years Of Age

jib2424 | Sep 3, 2017 | 34 posts since 2014

Which financial institutions offer early withdrawal penalty free distributions from IRA CDs for folks over 70 years of age?

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Bozo | Sep 3, 2017 | 1,375 posts since 2011

If you are referring to RMDs (which must commence the year you turn 70 1/2) it seems many (most?all?) offer penalty-free RMD distributions from IRA CDs, but the paperwork can be daunting, if you have multiple accounts. As I noted in the PenFed thread, a financial institution may limit your penalty-free withdrawal to the amount of your IRA CD with that particular institution times the percentage applicable to your age, e.g., $XXX,000 X .0364 (in your first year of RMD).

The IRA Disclosures are hardly uniform, and even branch managers can get confused on how penalty-free withdrawals work. It is always wise to set forth your query prior to purchasing an IRA CD, in writing, and get a reply, in writing, to reduce any potential for misunderstanding. Had I done so with Patelco (see my comment in the other thread), I would have carved the IRA CD into chunks. That said, no harm, no foul. I'll carve the IRA CD into chunks when it matures.

Bozo | Sep 3, 2017 | 1,375 posts since 2011

Example: Ozob (Bozo's alter ego) has (I'll make up an amount) $1,500,000 total in various IRA accounts. His RMD in year one (when he turns 70 1/2) is .0364 X $1,500,000. Ozob would like to take the RMD from a woefully-underperforming IRA CD. He calls the financial institution, and is advised that the RMD penalty-free withdrawal is limited to his particular IRA CD at the institution, which is $100,000, X .0364. He can withdraw $3640 penalty-free, but any amount in excess of that would be subject to the EWP.

On the other hand, Ozob could withdraw a "partial" from PenFed, StateFarmBank or (perhaps) NWFCU with no EWP, and, with said withdrawal, Ozob could satisfy his RMD in one transaction.

jib2424 | Sep 4, 2017 | 34 posts since 2014

Thank you.

Bozo | Sep 4, 2017 | 1,375 posts since 2011

jib2424, you're welcome. Managing RMDs can be daunting. Heck, managing retirement in general can be daunting. Finding PenFed's IRA Disclosure on PenFed's website can be daunting.

Funny (but true) story. Many years back, having just turned 59 1/2, I had a StateFarmBank IRA CD maturing. I called the toll-free number. After twenty minutes of elevator music, on hold, I finally was able to speak with a live human.

I explained that I might need a modest withdrawal from one of my IRA CDs, and asked if a short-term IRA CD option might be available. She advised me of the perquisite (no EWP for partial withdrawals for folks over 59 1/2), and suggested I roll the IRA CD into the 5-year. To this day, I wish I had kept her name, as I owe her a big smooch.

Seriously, when folks buy IRA CDs, I wonder how many actually read the IRA Disclosure(s). I know I didn't, until recently.

Over6T | Sep 9, 2017 | 31 posts since 2012

Perhaps I'm missing something here. I have IRA accounts at several CU's. Each year I calculate the RMD based on the combined total of all the IRA accounts. Then I withdraw that amount from the lowest performing CD(s) from one CU. I have previously told each CU to NOT do an automatic RMD withdrawal. My understanding is that the Required MINIMUM Distribution is just that a MINIMUM. As such, I could withdraw any amount from any or all my IRA accounts in any year, the RMD is simply the least amount that I must withdraw. From discussions with CU's I understand that they are not allowed by IRS rules to charge a EWP on withdrawals of IRA funds.
It seems to me the RMD calculation is rather straight forward, just multiply the total of all IRA accounts x the IRS percentage for your age. I then call the CU and say "pull this money from my IRA and move it to my after tax account". So far I've never had to fill out paperwork or jump through hoops to accomplish the annual RMD.
So tell me if I'm doing something wrong - or, if don't understand how the RMD system works.

jib2424 | Sep 9, 2017 | 34 posts since 2014

Can the entire annual Required Minimum Distribution be taken Early Withdrawal Penalty- free from just one IRA CD?

Ally6770 | Sep 9, 2017 | 4,293 posts since 2010

Yes it can but not all places do it. In the past Flagstar, Patelco, Navy (this one still does) Advia,
USA, and a few others. These are ones I have used in the last few years, taking our the full RMD from one IRA CD, even the amount for Roth conversions I have always taken out penalty free. But the RMD is for over 70 years of age only.

Bozo | Sep 10, 2017 | 1,375 posts since 2011

Ally6770, as noted in other threads, Patelco now takes the position that IRA CDs cannot be tapped for "partials" . You can take your particular age-related RMD percentage, or clean out the IRA CD account (if over 59 1/2), with no EWP. As noted elsewhere, a "workaround" is to open multiple chunks. Each chunk might approximate the RMD for a future year. You just close a "chunk", and pay no EWP.

Bozo | Sep 10, 2017 | 1,375 posts since 2011

Over6T, it can get complicated. I contemplated doing just what you have done with Patelco, and advised it was not possible. Stated plainly, you can satisfy your annual RMD by one withdrawal from one IRA CD (with no EWP), but only if the financial institution agrees.

If they don't, you could get an EWP.

Over6T | Sep 10, 2017 | 31 posts since 2012

Bozo: I see what you mean. Even though I don't have a Patelco account I reviewed their Member Handbook, re: pg 6, and it says (in part),
"If an account has an early withdrawal penalty, the penalty may be waived at our discretion if ...you withdraw funds from an IRA Certificate as part of a Required Minimum Distribution after reaching age 70-1/2..."
This is evidently the "gotcha" language that gives the impression that you can withdraw the IRA/RMD funds without a EWP, but ONLY if they say it's OK. Taken literally this language does not even give you the right of liquidating an entire CD without facing an EWP. The Patelco terms are worthy of a good fight since they were apparently written as a slight of hand deception. As written, I don't think Patelco's language is in keeping with the intent of the IRS rules for an RMD, though I have no IRS references that would reverse what Patelco is trying to do. Their RMD / EWP language is ambiguous at best.
This gives me some pause to now more closely review the terms of my CD's to see if this kind of smoke & mirrors language is there too.
Thanks for pointing this out.

Bozo | Sep 11, 2017 | 1,375 posts since 2011

Over6T, I really didn't think the Members' Handbook was ambiguous, nor did the Branch Manager, when I asked her specifically about partial withdrawals from IRA CDs for RMDs for folks over 70 1/2. Regrettably, I didn't confirm her understanding (and mine) with home office. As I noted, if you have a question, spell it out in detail, advise what you plan to do, and get a direct response. Do all this before you purchase the IRA CD.

Over6T | Sep 11, 2017 | 31 posts since 2012

Bozo: I've reviewed the specific IRA/RMD/EWP terms in 3 institutions that I have IRA funds. One institution's language is clear, I can withdraw RMD funds without a EWP. The other two have similar language to Patelco; that they "may" or "can" impose an EWP on IRA withdrawals. In these instances I would argue rather vigorously that since they did not notify me that they will impose the EWP on my IRA accounts at the time I opened the CD, that any subsequent changing of the terms are not in compliance with the language in the original deposit terms. I know... seemingly, most of these disclosure documents aren't worth anything since most (all?) have broad sweeping provisions that say they can change any of the terms at any time. Therein lies one of the more troubling aspects of depositing funds with most institutions, the conditions under which we deposit funds can unilaterally be changed by an institution without the depositors consent.
I agree with your strategy of "chunking" the CD amounts into approximate RMD values, I've been "chunking" both before and after tax accounts for quite a while, of particular importance in a (hopeful) rising interest rate market.

Bozo | Sep 11, 2017 | 1,375 posts since 2011

Over6T, I suspect (but could never prove) that a rising-rate environment and the availability of indirect rollovers has given many financial institutions pause with respect to their terms and conditions. For example, a retiree who does not need the RMD for expenses could just withdraw the IRA CD funds, and then invest the funds at a higher rate using an indirect rollover within 60 days.

Forbiddnig "partials", or limiting the amount of the penalty-free withdrawal to your age-based percentage times the funds at that institution, acts as an impediment to harvesting the low-hanging fruit.

Let's put it this way. Were I not retired, and asked by a financial institution how to make indirect rollovers to higher-rate accounts more difficult, that's what I'd recommend.

Bozo | Sep 11, 2017 | 1,375 posts since 2011

Moving right along, who might not need their RMD (in whole or in part) for expenses in retirement? Answer: (1) retirees with ample pensions; (2) retirees in low COLA areas who can make do on S/S; (3) retirees harvesting taxable dividends and/or income. I know my wife and I need our RMDs to pay the bills, but many may not.

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