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#1999176 - 03/02/15 05:23 PM IRA Early Withdrawal Penalties
amberleigh Offline
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Joined: May 2011
Posts: 34
Kansas
We currently waive all early withdrawal penalties on our IRA CDs for any customer over the age of 59 1/2. We are considering changing this for any new IRA CDs or existing IRAs once they renew and we can send a change in terms notice. My question is, how do most banks handle early withdrawal penalties for customers over 59 1/2 and then again for customers over 70 1/2. It seems crazy to me that we waive these fees for amounts over the customer's RMD which seems to encourage customers to move their funds when rates go up. Can anyone share how they handle early withdrawals at both age groups? Thanks.

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#1999231 - 03/02/15 07:31 PM Re: IRA Early Withdrawal Penalties amberleigh
Elwood P. Dowd Offline
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Elwood P. Dowd
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Distinguish between what your TISA disclosures say and what your initial disclosure for the IRA said about penalty waivers. What do your TISA disclosures actually say? Does the initial disclosure you distributed when the IRA was opened address the issue? If so, what does it say?

There is a rationale for waiving an early withdrawal penalty for a person over 70 1/2. They must take a withdrawal every year and waiving one penalty per year is just fair.

I know of no rationalization for waiving penalties prior to age 70 1/2.
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#1999239 - 03/02/15 07:46 PM Re: IRA Early Withdrawal Penalties amberleigh
amberleigh Offline
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Joined: May 2011
Posts: 34
Kansas
The reason I was given for waiving penalties prior to age 70 1/2 was that if someone wanted to take an early retirement they wanted them to be able to get to their money. My suggestion was to have them pick a short term CD that comes due more often. As far as the disclosures, we have never disclosed this to customers in any actual disclosure, however, my understanding was that it was always a verbal agreement. To me if we had a verbal agreement we still shouldn't make this change during a term, only at renewal. Do most banks waive the early withdrawal penalty for customers over 70 1/2 or do they just waive it for their RMD amount and charge the penalty for any amount over the RMD.

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#1999292 - 03/02/15 09:27 PM Re: IRA Early Withdrawal Penalties amberleigh
MtnHiker Offline
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Joined: Dec 2014
Posts: 78
New England
Our TISA disclosure for certificates states that we *may* allow a withdrawal from a certificate without penalty for any deposit contributed under an IRA for an individual 59.5+. When I started at my current employer we generally waived it only for RMDs or due to hardship, though more recently waivers have been approved more often than not on qualified distributions in general. The reason we have been given for this line of thought is similar to the one you have been given, amberleigh.
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#1999296 - 03/02/15 09:33 PM Re: IRA Early Withdrawal Penalties amberleigh
Elwood P. Dowd Offline
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Elwood P. Dowd
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Quote:
if we had a verbal agreement


That would mean the parties discussed the specific point and both understood how it would be interpreted. Given the number of customers involved, the number of employees involved, and the number of years gone by that's not realistic and is simply impossible for either party to prove.

Your contract with the customer is represented by the pieces of paper involved, specifically those where the customer received a copy. If you're talking about a term you were not required to disclose; e.g. special terms for IRA CD holders, then you are not required to give advance notice of a change.
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#1999310 - 03/02/15 09:58 PM Re: IRA Early Withdrawal Penalties amberleigh
el guapo Offline
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el guapo
Joined: Jul 2004
Posts: 345
Originally Posted By: amberleigh
We currently waive all early withdrawal penalties on our IRA CDs for any customer over the age of 59 1/2.


How very generous of you!

We only waive the interest penalty on a CD if it's a proper revocation within 7 days of receipt/acknowledgement of the IRA disclosure/application and for the client's actual RMD amount once they are over 70 1/2. I've made sure that this is clearly stated in the CD disclosure provided at account opening, as I've seen far too many places that have no language covering interest penalties from IRAs and just rely on their front line staff to make it up as they go along (meaning they just start waiving every penalty unless someone reigns them in).

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#1999832 - 03/04/15 09:10 PM Re: IRA Early Withdrawal Penalties Elwood P. Dowd
Elwood P. Dowd Offline
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I'm offering a more detailed response as there is a similar question in the "private" forum, but there's little point in answering it there as few will see it and it will not show up for most of those who might be searching for the information.

Regulation D allows for the waiver of early withdrawals from IRA deposits if the participant is over 59 1/2. It does not require a waiver, it simply allows it. The bank may refuse to allow penalty free waivers or choose any one of a wide array of circumstances where it will waive the penalty. The northern and southern most extremes are to waive the penalty on:

* any withdrawal after the individual reaches 59 1/2, or
* any withdrawal after the individual reaches 70 1/2 (the year in which a participant becomes responsible for beginning a systematic pattern of withdrawal from the IRA, specifically described as taking a "required distribution amount")

This is not a complete list. There are many other possibilities. To summarize: That which you are not required to do at all (waive penalties) you can do any way you wish.

When banks open an IRA the Internal Revenue Code requires them to distribute a "plain language disclosure" of the IRA's care, feeding and income tax ramifications. If your bank explained its conditions for waving early withdrawal penalties in that disclosure then you should consider it a contract with the participant. If the plain language disclsoure provides that you can unilaterally change the terms then you need to give notice of the change in your waiver practices as your plain language disclosure requires.

All of the above was true before the Truth in Savings Act, as implemented by Regulation DD, became law.

Per Regulation DD, a disclosure for a time deposit (including one held in an IRA) must include:

(ii) Early withdrawal penalties. A statement that a penalty will or may be imposed for early withdrawal, how it is calculated, and the conditions for its assessment.

Regulation DD does not require banks to disclose when that penalty would be waived. If a bank addressed penalty waivers in its plain language disclosure (or voluntarily in its TISA disclosure) then it is simply bound by what it said in that disclosure. If it did not, then the circumstances under which a waiver is allowed are a matter of bank policy or practice which, in my experience, may vary among branches, employees, or days of the week. Obviously, policy or practice can be changed without notice, but I suggest you keep in mind that some customers have been taking IRA withdrawals from time deposits for years and, if they have been penalty free, are probably under the impression that "it's against the law" to charge them a penalty.

Personal opinion:

* If I was going to change penalty free waivers on IRAs I would give notice to all affected parties, in writing, that it would take effect the following calendar year. I know most banks are not searching for deposits, but this is decidedly not the group of people you want to [censored] off if you would like to keep the core deposits you already have.

* Allowing one penalty free withdrawal per calendar year (of the RMD or a fixed amount, whichever is greater) for people over 70 1/2 allows them to remove the RMD which your bank knew very well they would have to do the day it opened the account. Allowing any additional waivers is accurately described above as "generous" and may be detrimental to your bank's best interests as well as common sense.

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#1999951 - 03/05/15 03:54 PM Re: IRA Early Withdrawal Penalties amberleigh
MtnHiker Offline
Member
Joined: Dec 2014
Posts: 78
New England
Quote:
* If I was going to change penalty free waivers on IRAs I would give notice to all affected parties, in writing, that it would take effect the following calendar year. I know most banks are not searching for deposits, but this is decidedly not the group of people you want to [censored] off if you would like to keep the core deposits you already have.


This is probably the line of thinking of the decision makers at my FI and why we rarely argue with someone over a penalty on IRA's if they are making a qualified distribution and is not withdrawing simply to chase a rate elsewhere. I think they also factor in that our penalty is rate based, and the rates are peanuts right now, resulting in a penalty of peanuts.... why argue with the customers that trusted you with their retirement account and may be making referrals to family and friends over a few or few dozen dollars? That's my $0.02

While I can see the point of choosing the proper investment based on when you will need access to the investment, too often I see IRA's being mishandled as an inheritance shelter, and I'm usually overjoyed when the participant ACTUALLY uses it for the benefit of their retirement.
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#1999973 - 03/05/15 04:30 PM Re: IRA Early Withdrawal Penalties MtnHiker
Elwood P. Dowd Offline
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Elwood P. Dowd
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Quote:
the rates are peanuts right now, resulting in a penalty of peanuts....


I really, really want to hug you right now! Waiving penalties after 59 1/2 was always a ridiculous decision. It's only when banks go scavenging for pennies that they realize what they have been doing all along was foolish and try to fix it immediately, customer be damned. Aggghhhh!
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