Personal Finance and Investing

I have been, for a very long time on this board, a stickler for accuracy in terminology with regard to these matters. It means something when you say, as an example, "I Invest in my IRA" or you say "I have investments inside my IRA". These two statements indicate a different understanding of method and definitions. The first statement is both incomplete and/or inaccurate and the second isn't. Follow?

Please, PLEASE do not take anything I write as condescending. What you are about to read may come off to you as me being so, but I promise, that is not my intent. If we were sitting across your dining room table from one another, you would be able to see my face and know that I am being sincere and have nothing but your financial well being at heart.

OK?

It is clear to me that the application of much of what you wrote regards individuals OLDER than 59 1/2 and are therefore eligible to withdraw funds from an IRA in the normal way, ie; as these accounts are designed to facilitate when one turns 60 or so years old.

I have found the best way to dissect a post is to do the excerpt quote thing, take each point and respond. So ....

I'll start with your title line;

Sometimes the "penalty" is merely a fee or a commission. Sometimes there is no penalty or fee at all, as I said in my previous post. If we are talking about brokered CD's, the most you'll have is a small commission for the sale and buy. When I was trading, the fees charged on trading CD's was so small - as in zero in most cases - that it gets lost in your annual IRA maintenance fees.


No, you can't. The individual purchaser can not change the "terms" of a Certificate of Deposit. They are what they are and you agree with them when you sign the contract. There are exceptions, of course, but for the most part, a CD is what it is.


I do not doubt that you are being honest and sincere. What I doubt is the mechanics of what is actually going on.


Absolutely spot on. That should be the intent of anyone saving for retirement. Get the best return on their money they can, given their individual tolerance for risk.



In the first sentence, you used to word "account" incorrectly. What you buy is the higher yield CD, not "account". Again, terminology matters. A CD is an "Asset" for the purposes of its place inside your IRA and a "Contract" for the purposes of your agreement with your bank. What you are describing sounds like what is known as a "Rolling CD" or a Constant Maturity or "Callable CD" and may go by many other names, but the fact is, all of this would be spelled out in the original document you signed when you bought it initially. I don't doubt for one second that your bank and many others offer CD programs (for lack of a better term) that will allow the client to change to a higher yield when it comes available with no penalty. But the fact is, it is still a time deposit. You can't "change terms" by walking into your bank 13 months into owning a 5 year CD and say "I want 3% on 2 years" when the CD you bought is 5 years and the current rate is 1%. If, during the course of owning that CD, the rates rise from 1% to 1.5%, I see it as completely possible if not likely, that your agreement with the bank would allow for a change before maturity with no penalty, PROVIDING the bank offers such an option. If they do, then great! And sure, not paying a penalty in this case would be expected because you are leaving the money where it is, at YOUR BANK!


This backs up what I described above.


This indicates to me that you are indeed older than 60 and are taking normal, penalty free withdrawals from your IRA's. No problem, great, wonderful, it's good that you are able to do this.



I'll get to the link in a sec, but as far as the second part...AHA! Right! In your savings you have regular, run of the mill CD's that if you withdraw early, you will be subject to penalties.

Your link is a conversation that took place in 2008. That's fine, but it is between people who are not clear on terminology either. But that's OK...I get the gist.

It seems what they are discussing is the withdrawal of PRINCIPAL on accounts containing CD's well in excess of minimum deposit amounts. For the most part, CD's, like Bonds, have a "Par Value" of $1000.00. They mature at that amount. You give them a grand and over time they pay you interest. At the end of the term, you get your grand back. The discussion at the link leads me to believe they are talking about taking distributions from the principal, ie: the initial money put in, which is YOUR money, no matter what, and the bank is OK with that. What they don't say is whether or not there is an annual limit or a minimum balance. I can completely understand that a bank would allow withdrawals of principal from an IRA that had say...$100,000 in CD's. I get it.

The money you put in a CD is YOURS and the bank can not keep any of it from you at any time for any reason, REGARDLESS of the type of account it is held in. If it is held in an IRA and you are older than 59 1/2, you can take out as much as you want, you just have to pay income taxes on it. As I said above, the MOST a bank will penalize you is a few months of interest. They can NOT however, keep any of the principal. If you give a bank 10 grand and buy a CD, and ten days later want your ten grand back, they will give you ten thousand dollars. THEY HAVE TO. What they don't have to give you is any interest accrued in that short of a time, pursuant to the agreement you signed.

There are some other ins and outs regarding the conversation on your link that aren't addressed, like annual contribution limits of IRA's, ages of the individuals involved, RMD's ("Required Minimum Distributions&quot for those over 70 1/2 and a few other points, but that is not really applicable here.

I understand the point you are trying to convey to your (our) readers, but I strongly feel it is important to be clear. I trust you would agree.

I hope what I have written wasn't a distraction.

All the best.