IRA CD Question

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Question:

I have a question regarding an IRA CD. There has been some discussion among my coworkers, that an IRA CD does not receive any early withdrawal penalties if the owner is over 59 ½ years of age. I am not referring to any RMD or other scheduled distribution. I am referring to a situation where the client rate shops another institution and finds a better rate. Can the CD term be broken and the client take the money elsewhere without penalty, because of the fact that it is an IRA? Is that a Federal IRA rule or is it solely based on banks internal policy?

Answer:

IRA rules, written by the IRS, allow depositors to have a rescission period during the first week after establishing an IRA. Regulation D must parallel the IRA rules, so an exception to Regulation D’s definition of time deposit waives the penalty for an IRA closed within the first seven days. If an IRA customer closes the new IRA on day seven or before, the total principal is returned. However, all interest earned must be forfeited. If the customer closes the account on day eight or after, the bank may impose its normal early withdrawal penalty (to include principal, if necessary). On day eight or after, waiver of the penalty is the bank’s option. [Section 204.2(c)(1)(i) footnote 1(a)].

First published on BankersOnline.com 5/03/10