A reader wrote to me recently regarding penalties he is facing with regard to required minimum distributions (RMDs) from his IRA account.
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Apparently, all of his IRAs are invested in CDs, and many of his CDs are not maturing this year. He is older than 73, and he has told his custodian to withdraw at year-end the required amount from his CDs in order to meet the RMDs.
He bought all his IRAs in CDs through his credit union. The credit union has informed him that because some of his CDs will not mature prior to year-end, he will be facing penalties if he withdraws funds from CDs before they mature.
He wanted to know how he could avoid penalties. Obviously, his credit union is not willing to waive penalties if he withdraws funds from a CD that has not matured at year-end.
What options does the reader have to avoid penalties?
From a long-term perspective, I told him that he should not limit his IRA investments to CDs. I explained to him that if he invested in money-market accounts, he would not be facing the penalties he is now facing. I also told him that he should not tell his custodian at his credit union to withdraw funds from all his CDs at year-end to satisfy RMD requirements. Apparently, he has told his custodian to withdraw RMDs from ALL his IRAs at year-end.
Hopefully, some of his CDs will mature prior to year-end. He can then withdraw a sufficient amount from those proceeds to meet some of his RMD requirements. If the proceeds from the CDs that mature in 2026 are insufficient to meet his RMD obligation, hopefully he can use other assets he has, other than CDs, to meet his RMD requirements.
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I pointed out to the reader that he should not tell his custodian to withdraw RMDs from all his IRAs. The IRS allows individuals to aggregate RMDs and take distributions from one or more IRA accounts of their choosing to meet the full obligation.
So, if an individual has a CD that matures in 2026, he can roll over those proceeds to an IRA money-market account. He can then use the money-market account to withdraw sufficient funds to satisfy his RMD for 2026. Then there will be no penalties.
If an individual does not have any CD in his IRA account that matures in 2026, he should try to use assets other than CDs to fund the RMD requirement..
Bottom line : Don’t restrict your IRA investment to CDs unless your custodian is willing to waive the fees for terminating a CD prior to maturity. If you want to invest some of your IRA conservatively, use money-market funds or other savings vehicles for which there are no penalties for early withdrawals. Do not restrict your IRA investments to CDs if you are over 73. CDs are not a good vehicle after you reach age 73, when you are required to make yearly RMDs.
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Elliot Raphaelson welcomes your questions and comments at [email protected].