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Using RMDs to avoid early withdrawal penalties on CDs
Old 04-20-2018, 05:36 PM   #1
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Using RMDs to avoid early withdrawal penalties on CDs

Caution: Maybe this is old news or very obvious--apologies in advance.

I help manage accounts for a relative, and she has a significant portion of her tIRA funds in CDs with Ally bank. Ally allows account holders to make penalty-free withdrawals of funds from their CDs as required to meet the RMDs on those CDs. Apparently, this policy varies from bank to bank.

Now, as I rebalance the assets in this account, I don't need to reduce her CD holdings (her stocks did well last year, so she'll be selling some and buying more CDs). But, since CD rates have gone up since she bought hers, it looks like the smart thing to do is to take 100% of her RMD from these older CDs, then sell some of her stocks within the tIRA and buy new CDs (within the tIRA) at the present (higher) rate. There doesn't appear to be any Ally bank prohibition against buying more CDs in the IRA after you sell some. End result: Stocks/CD allocations are rebalanced, and her CD portion is earning more than before.

It's not a lot of money--her RMDs are about 5% per year, and she can't take her entire RMD (all tIRA assets) penalty-free from the Ally CDs (i.e. she can only take approx 5% of the CD balance), so this won't result in a big improvement in her situation. But, it is risk free and not hard to do. The improved returns might buy her a few pizzas. And, if (as it appears) banks are increasing their early withdrawal penalties, this RMD "escape hatch" might become an even more useful tool.

Anyway, it occurs to me that, for those who are subject to RMDs and who own CDs, this might be another item on the rebalancing checklist: If CD rates have gone up and you'd like to take advantage of it, take your RMD from the existing CDs and then buy some new CDs using other assets from within the tIRA.

Similarly, if you are about to bail on a CD and accept the early withdrawal penalty hit in order to get the higher rate, if you've got an RMD "opportunity" available, use that first to reduce the amount of CD funds subject to the early withdrawal penalty.
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Old 04-21-2018, 11:26 AM   #2
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Interesting Concept. Just starting taking RMD's last year. Also, from CDs.

Just a thought. I seemed to remember some Banks/Credit unions, would allow you to
withdraw $, penalty free from IRA CD's as long as you were 59 1/2. (not related to RMDS).

Will have to double check this. Good way to get higher IRA CD returns, with out the EWP.
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Old 04-23-2018, 03:48 PM   #3
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Quote:
Originally Posted by wolf View Post
Interesting Concept. Just starting taking RMD's last year. Also, from CDs.

Just a thought. I seemed to remember some Banks/Credit unions, would allow you to
withdraw $, penalty free from IRA CD's as long as you were 59 1/2. (not related to RMDS).


Will have to double check this. Good way to get higher IRA CD returns, with out the EWP.
My older Penfed CD's have this but they removed that provision in the newer CD's. I called to ask them about it and it seems they may be lax on enforcement, so I would ask to waive the EWP if I find myself in that situation.
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