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Regarding The Details Of An Early Withdrawal From A Penfed IRA Certificate, For Members Over The Age Of 59 1/2

demet
  |     |   1 posts since 2021

Regarding the details of an early withdrawal from a Penfed IRA certificate, for members over the age of 59 1/2.

The disclaimer in the IRA certificate promotion states:

"Partial withdrawals for members over the age 59 1/2 (including Required Minimum Distributions) and qualified distributions regardless of age (including Disability) may be processed from IRA certificates without incurring an early redemption penalty."

– The disclaimer appears to read that funds can be withdrawn from an IRA certificate, but remain 'in' an IRA account (example, if rates should change).

I discussed the issue with a Penfed CSR, she did not have an immediate response but sent a link to the IRA application document.

In the PenFed Individual Retirement Arrangement document for new accounts current of January 2020. Under the INDIVIDUAL RETIREMENT AGREEMENT DISCLOSURE STATEMENT:

g. PENALTIES. In the event of early withdrawal, the following penalties apply:

(1) If redeemed within the first year, all dividends will be forfeited.

(2) If after the first year, but prior to the maturity date, the early withdrawal penalty will equal 30% of what would have been earned if the Certificate had been held to maturity, not to exceed total dividends earned.

(3) 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 59 1/2 and takes a partial withdrawal in the form of a distribution.

Partial withdrawals may be made, subject to early withdrawal penalties as described in paragraph (g) 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.

– Section (iv) states that the partial withdrawal is in the form of a distribution. I understand this to be a distribution 'out' of the IRA, that may incur a tax liability.

If there is a different interpretation, please comment in this blog.

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Answers
111
  |     |   672 posts since 2019
My take on demet's post is that his question centers on the distinction between an IRA account, versus the CD(s) or other assets held within that IRA account. Although perhaps subtle, it seems a fairly straightforward enough “concern/question”.

Conceptually an IRA account at PenFed (or anyplace else) is a tax-deferred “container” that can hold 1 or more CDs, and/or 1 or more other assets. PenFed has long had a policy that members over 59.5 years old may make partial early withdrawals to their IRA CDs. without incurring the normal PenFed EWP (Early Withdrawal Penalty) for such CDs.

As I see it, demet seems to be asking whether this means that if such a PenFed member took such an EWP-free partial IRA CD distribution - regarding those funds withdrawn from the CD(s), would the member have to also remove these funds from the IRA (a taxable event), or could they leave these fund inside the PenFed IRA in some other capacity (money market, buying another IRA CD, etc.), and not suffer a taxable event?

demet's understanding so far is that because PenFed's text states that the “partial withdrawal [would be] in the form of a distribution”, he understands that to mean a distribution “out“ of the IRA - one which would almost certainly incur a tax liability. He's simply asking whether others here have that same understanding, or whether they have a different interpretation.

Frankly, I don't know that exact answer to his question, but it is a reasonable question, and I'd suggest that PenFed could have done a better answering it than they seem to have done. If his numbers are substantial - i.e., if it really matters - he might want to simply do a test and do a partial withdrawal for a small amount - and see what happens. Admittedly it might take a while for all the 1099-R and 5498 forms to settle out, but at least the answer would then be known.
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Choice
  |     |   937 posts since 2020
IRA funds distributed is a taxable event. Those distributed funds cannot be put back into an IRA (exception would be a 60 day rollover but that defeats a distribution and I don’t read that in your post). What is your specific concern/question?
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CuriousDave
  |     |   233 posts since 2018
Their rules seem to be clear enough.
In addition, although their rules do not address the issue, it is standard in the FI industry to not only allow but also to alert customers who have reached the applicable ages to take their annual Required Minimum Distributions (RMDs), because that is a legal requirement. Of course, FIs can penalize distributions taken in excess of the applicable RMD amounts.
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