Buy CDs in an IRA - what are the mechanics and gotchas?

[audreyh1]

I was helping someone sort out some of their financial accounts, she's interested in CDs and I don't understand enough of the ramifications of buying CDs inside of IRAs.

For people with IRAs that want to buy a CD:

* Do you rollover the funds open an IRA at the institution offering the CD rate you want? When it matures you would have to do another rollover to move it somewhere else? Do you have to worry about rollover time limits in this scenario? How do you handle the transfer?

* Do you buy a brokered CD at the brokerage that currently holds your IRA account?

Are there gotcha's with an IRA rollover for a CD?

Do you end up with an IRA account for each CD?

Dealing with an IRA rollover whenever you need to buy a new CD seems like a lot of trouble. This is supposing that a different institution has the better deal each time, of course.

On the other hand, buying brokered CDs within an existing IRA brokerage account seems like the costs would be higher since you are dealing with the secondary market and the brokerage would get some commission, but I'm not sure where the costs creep in.

Thanks!

 

[pb4uski]

I did this a few years ago with PenFed. First, you open an IRA with the financial institution. Then you transfer funds into the new IRA, usually from another IRA but in some cases from cash if it is a contribution. Then the IRA uses the funds to buy a CD.

One IRA, numerous CDs. I bought a number of them in case I ever wanted to break them that it wasn't an all or nothing thing.

The problem with brokered CDs is that the value will change with changes in interest rates, like a bond, but if you intend to hold to term then it probably doesn't matter.

 

[Mulligan]

Audrey, I had cash laying around in my money market IRA brokerage account in Vanguard. I bought a brokered 10 year CD with it. It was just like buying a stock as far as ease goes. Now originally I just had a Vanguard IRA account. I converted it into a Brokerage account and then bought the CD.
Here is a slight word of caution for a nervous Nellie buying a brokered CD. Unlike traditional CDs where you just get a quarterly statement showing interest earned, the brokerage account will attach a daily "market value" to that CD. So the value of that CD could drop showing a loss of principal. Of course you are never out an money if you hold to maturity, but it may bother some to see that.
Why do I say that? Because it did me as I sold with a slight capital gain on an upswing last year. I decided rates were not going anywhere, so I dumped the 3.4% yield and bought more preferred stock.


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[Theseus]

Pretty much the same experience as pb4uski and mulligan. I've bought some for my 401k rollover account at TD, attempting to build a few ladders. I do not buy "callable" and also avoid secondary market CD's. I can choose the issuing bank, and have paid no commissions on purchase of CD's, quite probably TD is remunerated by the issuing banks for offering the service to customers. Agree that the pricing based on secondary market marketability of existing CD takes a little getting used to, but holding until maturity makes that nothing more than a slight distraction.

 

[Mulligan]

Pretty much the same experience as pb4uski and mulligan. I've bought some for my 401k rollover account at TD, attempting to build a few ladders. I do not buy "callable" and also avoid secondary market CD's. I can choose the issuing bank, and have paid no commissions on purchase of CD's, quite probably TD is remunerated by the issuing banks for offering the service to customers. Agree that the pricing based on secondary market marketability of existing CD takes a little getting used to, but holding until maturity makes that nothing more than a slight distraction.

You are correct Theseus, It should only be a slight distraction (or really no distraction), but it really annoyed me and it should not have. When I bought it I was thrilled to death last year to catch a 3.4% yield and hold it for ten years. But then as most things I buy in the first week, the secondary market value of it dropped and ticked me off having to stare at it dropping. I just assumed it was like regular CD's and I was wrong. Then the market changed and only 3% CDs were available so I sold mine at a profit and one dividend and got out. If I am ever going to lose money investing it is not going to be with a CD.


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[audreyh1]

About the transfer from one IRA to another. Is this an IRA rollover? Does the source institution issue a check to the destination institution? I was not sure how this should be handled.

Thanks!

 

[audreyh1]

On the brokered CDs - my friend mentioned being told about a 5yr CD at 4%, but that didn't make sense to me as the best current 5yr CDs are in the 2.25 to 2.45% range. Does the buyer actually pay more for the brokered CD to make up the difference in interest paid?

 

[Mulligan]

Mine was an internal transfer within Vanguard. But when I did a one time transfer from a small Fidelity IRA to my HSA account, I filled out paperwork from my HSA institution and they acquired the funds from Fido.


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[Mulligan]

On the brokered CDs - my friend mentioned being told about a 5yr CD at 4%, but that didn't make sense to me as the best current 5yr CDs are in the 2.25 to 2.45% range. Does the buyer actually pay more for the brokered CD to make up the difference in interest paid?

Are you sure the friend didn't find some low maximum deposit teaser yield and didn't read the fine print? I havent heard of a regular 4% 5 year CD in years. And you know darn well someone would be bragging about getting it here on this forum!


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[bingybear]

About the transfer from one IRA to another. Is this an IRA rollover? Does the source institution issue a check to the destination institution? I was not sure how this should be handled.

Thanks!

It is not really a rollover.. like rolling a 401k into an IRA. You would want to do a custodian to custodian transfer. Set up the receiving account first. If you get checks written to you... this would likely be considered a rollover under the new rules with a limited number of rollovers per year.

I've usually found that brokered CDs yield a little less for the same offering (same bank and terms). The sweet deal could have been a teaser, or a stepped interest rate that is callable, or from an institution that is in trouble.

Another advantage of brokered CDs is you can do all this without moving it around.... potentially a lot. When this CD matures, do you move to a different bank or back to a brokerage?

 

[Mulligan]

It is not really a rollover.. like rolling a 401k into an IRA. You would want to do a custodian to custodian transfer. Set up the receiving account first. If you get checks written to you... this would likely be considered a rollover under the new rules with a limited number of rollovers per year.



I've usually found that brokered CDs yield a little less for the same offering (same bank and terms). The sweet deal could have been a teaser, or a stepped interest rate that is callable, or from an institution that is in trouble.



Another advantage of brokered CDs is you can do all this without moving it around.... potentially a lot. When this CD matures, do you move to a different bank or back to a brokerage?

That is a good point Bingy. If sources of funds are in separate places, I THINK you can only physically touch with your paws one rollover every 12 months I believe. You can do unlimited custodian to custodian transfers.
I almost got tripped up on that last year, and a Vanguard rep warned me about it. So I decided to not mess with paper work on a direct transfer on my last CD in a bank and renewed it for one more year. When it matures again in January I will do a rollover then as the 12 months will have passed.


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[audreyh1]

Are you sure the friend didn't find some low maximum deposit teaser yield and didn't read the fine print? I havent heard of a regular 4% 5 year CD in years. And you know darn well someone would be bragging about getting it here on this forum!


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This was mentioned to her by a financial advisor, which is why I assumed it was a brokered CD. But yeah - didn't make sense to me. I showed here where to find out CD rates, and we're both wondering "what's the catch?".

 

[audreyh1]

It is not really a rollover.. like rolling a 401k into an IRA. You would want to do a custodian to custodian transfer. Set up the receiving account first. If you get checks written to you... this would likely be considered a rollover under the new rules with a limited number of rollovers per year.

I've usually found that brokered CDs yield a little less for the same offering (same bank and terms). The sweet deal could have been a teaser, or a stepped interest rate that is callable, or from an institution that is in trouble.

Another advantage of brokered CDs is you can do all this without moving it around.... potentially a lot. When this CD matures, do you move to a different bank or back to a brokerage?

Right - that's what I'm thinking for her IRAs, it might be more convenient this way.

But if she does the CD directly (which she figured out means no account fees to a broker) I'll make sure she understands about custodian to custodian transfers. That's why I'm trying to understand the process.

 

[meierlde]

I suspect you can go to most banks and they will be glad to open an IRA with a CD inside. Later if desired you can do a custodian to custodian transfer. Also many credit unions will do IRA cds. The bank will be glad to renew the CD at its maturity.

 

[pb4uski]

About the transfer from one IRA to another. Is this an IRA rollover? Does the source institution issue a check to the destination institution? I was not sure how this should be handled.

Thanks!

IIRC I think it was a transfer from Vanguard to PenFed in my case. Though another alternative would be to have your IRA send you a check made out to "[CD Bank] FBO audreyh1" and then deposit that check into your new IRA with the bank.

One downside of a bank CD rather than a broker CD is that you have one more IRA account to track but that is a minor distraction.

 

[jim584672]

A small side question:
If you had a CD in a Trad IRA and a CD in a Roth IRA and wanted to do a Roth conversion, could you transfer the actual CD from one account to another (an in kind transfer)?

 

[pb4uski]

If it was a brokered CD I suspect yes because they are treated like securities and are tradeable. If it was a bank CD then it would be up to the bank, but my guess would be not but it would be worth asking them.

 

[lem1955]

I just bought 2 years worth of CD's inside my Vanguard IRA. They show up in the brokerage account. Proceeds will go to my Prime MM account inside the tIRA. It freaked me out when I saw they were worth less than face value but I have no intention of selling early, so I know they are fine. The only other wrinkle I can see is that they aren't recognized as cash holdings in the Asset mix graph and chart. They may be included as Bonds but I'm not sure. I think of them as cash.

 

[Ready]

A number of forum members went through this exercise back when PenFed was offering 3% CDs. I transferred cash from Vanguard to an IRA I created at PenFed for the 3% 5 year CDs. Vanguard cut the check and mailed it directly to PenFed.

If brokered CDs were paying 3%, I likely would have just bought them through Vanguard to avoid having to open another IRA account at a separate institution. But nobody was offering 3% or anything close to that, so the extra paperwork seemed to be worth the hassle.

However, if the CD was only 1-2 years, I might have passed. I figure a bit of hassle every five years is no big deal, but every one to two years is more than I'm willing to fuss with.

I'm not aware of any 4% brokered CDs, but if you do find one, please share it with us. I'll transfer all of my CD funds immediately!

 

[audreyh1]

A number of forum members went through this exercise back when PenFed was offering 3% CDs. I transferred cash from Vanguard to an IRA I created at PenFed for the 3% 5 year CDs. Vanguard cut the check and mailed it directly to PenFed.

If brokered CDs were paying 3%, I likely would have just bought them through Vanguard to avoid having to open another IRA account at a separate institution. But nobody was offering 3% or anything close to that, so the extra paperwork seemed to be worth the hassle.

However, if the CD was only 1-2 years, I might have passed. I figure a bit of hassle every five years is no big deal, but every one to two years is more than I'm willing to fuss with.

I'm not aware of any 4% brokered CDs, but if you do find one, please share it with us. I'll transfer all of my CD funds immediately!

Thanks!

Did you have to instruct Vanguard to mail the check to PenFed, or did PenFed initiate the transaction for you?

 

[MBSC]

On the brokered CDs - my friend mentioned being told about a 5yr CD at 4%, but that didn't make sense to me as the best current 5yr CDs are in the 2.25 to 2.45% range. Does the buyer actually pay more for the brokered CD to make up the difference in interest paid?

(snip)
....On the other hand, buying brokered CDs within an existing IRA brokerage account seems like the costs would be higher since you are dealing with the secondary market and the brokerage would get some commission, but I'm not sure where the costs creep in.

My brokerage is offering a 3.9% CD maturing 9/3/2019. It's being sold at a premium of 106.65 making the YTM 2.17%. CUSIP 36160VLH2. One person's 3.9% CD is another person's 2.17% CD depending on your viewpoint.

My brokerage has no commission to purchase new issue CDs. The brokerage receives a 'placement fee' from the CD issuer. This makes it easy to compare the yield to individual bank CDs. For secondary market CDs, the commission is built into the price as a 'markup' and the YTM reflects this charge. IOW, the YTM would be higher if there were no commission/markup. Again, this makes it easy to compare their yields to new issue brokered CDs and individual bank CDs.

First, I screen out banks I've never heard of and callable CDs. Then yield is my only criteria since they are FDIC insured and the YTM includes the markup. This usually leads me to secondary market brokered CDs. My brokered CDs pay interest semi-annually like a bond.

 

[audreyh1]

My brokerage is offering a 3.9% CD maturing 9/3/2019. It's being sold at a premium of 106.65 making the YTM 2.17%. CUSIP 36160VLH2. One person's 3.9% CD is another person's 2.17% CD depending on your viewpoint.

OK - that's what I was looking for. Buying it at a premium. I thought it must be something like that. What is important is finding out the yield to maturity. Thanks for the terminology.

My brokerage has no commission to purchase new issue CDs. The brokerage receives a 'placement fee' from the CD issuer. This makes it easy to compare the yield to individual bank CDs. For secondary market CDs, the commission is built into the price as a 'markup' and the YTM reflects this charge. IOW, the YTM would be higher if there were no commission/markup. Again, this makes it easy to compare their yields to new issue brokered CDs and individual bank CDs.

First, I screen out banks I've never heard of and callable CDs. Then yield is my only criteria since they are FDIC insured and the YTM includes the markup. This usually leads me to secondary market brokered CDs. My brokered CDs pay interest semi-annually like a bond.

Thanks. Finding out whether the brokerage can buy new CDs is also important. Again - knowing YTM will cover all the cases including the commision for CDs bought on the secondary market.

 

[Ready]

Thanks!

Did you have to instruct Vanguard to mail the check to PenFed, or did PenFed initiate the transaction for you?

I seem to recall PenFed providing the mailing instructions to me, which I then forwarded to Vanguard with a request to cut the check and mail it directly to PenFed. Vanguard needs to know that it is a transfer to another IRA so that it doesn't trigger a taxable transaction for reporting purposes.

 

[audreyh1]

I seem to recall PenFed providing the mailing instructions to me, which I then forwarded to Vanguard with a request to cut the check and mail it directly to PenFed. Vanguard needs to know that it is a transfer to another IRA so that it doesn't trigger a taxable transaction for reporting purposes.

Thanks for those details.

 

[bmcgonig]

I did one a few months ago. Transferring IRA money from Etrade to a credit union. I filled out a form online at the credit union website to open an IRA. Then a form to transfer from Etrade at the credit union website. Then the credit union took care of it. I don't think I contacted Etrade at all.


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