Buying CDs in Vanguard IRA brokerage account?

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Buying CDs in Vanguard IRA brokerage account?

Postby Browser » Fri Dec 28, 2012 4:44 pm

I was considering cashing out some TIPS and using the proceeds to purchase CDs in my IRA brokerage account at Vanguard. I've never purchased CDs in my retirement account before. I've only bought a CD from time to time at the local bank. So, I'm seeking information and advice. I just did a check online of the offerings and there were only 5 offerings of 5-year CDs paying 1.1%. I thought that you could get as much as 2% or so on these, so 1.1% doesn't seem particularly enticing. Plus I don't believe these can be redeemed early, which I believe some CDs can be - a nice feature in case rates rise within the next 5 years, which seems likely to me. Is this the typical pickings available in CDs through Vanguard? Is there another venue for purchasing CDs inside an IRA that provides some better options? If this is all that's available to me (at Vanguard) I think I'd be about as well off putting money into a ST bond fund or something else, or maybe just hanging onto the TIPS.
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby centrifuge41 » Fri Dec 28, 2012 5:12 pm

Well, I can't speak for VBS since I don't have an account. But I've bought brokered CDs in Fidelity and TD Ameritrade, since I've had funds locked up for x months needed to fulfill new money bonuses.

The brokered CDs I had didn't pay a lot. 0.45% and 0.40% for 6 to 9 months. ING's liquid account was paying 0.80%. But yea, if you're not forced to lock up your capital for x months, it doesn't seem like brokered CDs are a good deal. If you really need more interest and no volatility all inside an IRA, you can get Ally CDs inside an Ally IRA.
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby khh » Fri Dec 28, 2012 5:26 pm

I built two 5-yr CD ladders in the past year, one in Jan and the other in July. I got 2.05% on the 5-yr in Jan and 1.80% in July. These rates were pretty close the the top rates I saw quoted at various sites such as http://bankcd.com/cdrates.html?product= ... _button=Go
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby Browser » Fri Dec 28, 2012 6:12 pm

I just got a weird response from my Credit Union that maybe someone can figure out. They have a pretty good rate on a 37-month CD of 2.00%. With their regular CDs there is an early withdrawal penalty of 3-6 months interest. I thought that sounded pretty good so I got on a chat to determine if I could open an IRA with them to transfer funds from my Vanguard IRA into and then purchase the CD. It sounded like I could do this until I asked about early withdrawal penalties on the CD and then it got strange. I was told that there would be an IRS penalty, and I explained I wasn't talking about withdrawing the money FROM the IRA, just cashing out the CD before maturity and leaving the cash in the IRA. Then I was told there is a difference between a regular CD and an IRA CD, and there are IRS penalties if you cash out an IRA CD. Furthermore, I couldn't hold cash in their IRA because it wasn't "liquid" - yes that's what she said. At this point I gave up chatting in hopes I could figure out what the shell she was talking about. Anybody know?
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby HueyLD » Fri Dec 28, 2012 6:43 pm

Browser wrote:It sounded like I could do this until I asked about early withdrawal penalties on the CD and then it got strange. I was told that there would be an IRS penalty, and I explained I wasn't talking about withdrawing the money FROM the IRA, just cashing out the CD before maturity and leaving the cash in the IRA. Then I was told there is a difference between a regular CD and an IRA CD, and there are IRS penalties if you cash out an IRA CD. Furthermore, I couldn't hold cash in their IRA because it wasn't "liquid" - yes that's what she said. At this point I gave up chatting in hopes I could figure out what the shell she was talking about.

What the CSR said didn't make sense at all because one should be able to place IRA funds in both CDs and money market accounts. I think you should ask for their IRA disclosure statement ILO talking to someone who may be clueless.
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby investor.saver1 » Fri Dec 28, 2012 7:33 pm

Hi broswer,

I suggest you ask to speak with the Credit Union's IRA specialist. Sadly, few front line CSRs have a clue with respect to IRAs. You should not have any unusual issues with CDs in IRAs. CDs inside IRAs are handled exacly like CDs outside IRAs. If your Credit Unions handles them differently, it is only because they have different account rules.
Investor.Saver1 | | Experience is something you don't get until just after you need it.
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby john94549 » Fri Dec 28, 2012 8:08 pm

Credit unions and banks offer IRA CDs. The few times I asked whether I could "park" IRA money with them (such as when a CD was maturing, and I wasn't sure whether to move it or not), I received a reply similar to the OP. Only CDs. Not savings accounts, not money market accounts, just CDs. That made no sense to me either, since Vanguard offers VMMXX in its IRA, 401Ks offer stable value and money market funds, but I guess banks and credit unions have their rules.

That said, it is not terribly difficult to do a custodian-to-custodian transfer of IRA funds from Vanguard to a bank or credit union. It is not all that hard to find 2% 5-year IRA CDs. Check Ken's blog: http://www.depositaccounts.com, click on the "blog" tab at the top, then scroll down a few posts to find the one for recent CD deals.

As to the OP's follow-up question, the CSR was "sorta" right. If you break an IRA CD, you owe the early-withdrawal penalty to the bank or credit union*, and a 10% penalty to the IRS UNLESS you do a custodian-to-custodian transfer OUT or roll the funds into another IRA CD or IRA account (such as back to Vanguard) within 60 days. You'd also owe income tax unless you do the c-to-c transfer or rollover. The 10% penalty does not apply to those over 59 1/2. In addition, several institutions waive the early-withdrawal penalty for partial withdrawals for that age cohort. I've done two partials with StateFarmBank, no problems, no penalties. Just paid the income tax.

*These penalties can really eat you up, and they vary all over the place. In addition, many banks and credit unions now have the dreaded words "at our discretion" with respect to breaking CDs. So be careful out there. I've posted some of my "lessons learned" in other threads.
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby Browser » Fri Dec 28, 2012 9:06 pm

john94549 wrote:Credit unions and banks offer IRA CDs. The few times I asked whether I could "park" IRA money with them (such as when a CD was maturing, and I wasn't sure whether to move it or not), I received a reply similar to the OP. Only CDs. Not savings accounts, not money market accounts, just CDs. That made no sense to me either, since Vanguard offers VMMXX in its IRA, 401Ks offer stable value and money market funds, but I guess banks and credit unions have their rules.

That said, it is not terribly difficult to do a custodian-to-custodian transfer of IRA funds from Vanguard to a bank or credit union. It is not all that hard to find 2% 5-year IRA CDs. Check Ken's blog: http://www.depositaccounts.com, click on the "blog" tab at the top, then scroll down a few posts to find the one for recent CD deals.

As to the OP's follow-up question, the CSR was "sorta" right. If you break an IRA CD, you owe the early-withdrawal penalty to the bank or credit union*, and a 10% penalty to the IRS UNLESS you do a custodian-to-custodian transfer OUT or roll the funds into another IRA CD or IRA account (such as back to Vanguard) within 60 days. You'd also owe income tax unless you do the c-to-c transfer or rollover. The 10% penalty does not apply to those over 59 1/2. In addition, several institutions waive the early-withdrawal penalty for partial withdrawals for that age cohort. I've done two partials with StateFarmBank, no problems, no penalties. Just paid the income tax.

*These penalties can really eat you up, and they vary all over the place. In addition, many banks and credit unions now have the dreaded words "at our discretion" with respect to breaking CDs. So be careful out there. I've posted some of my "lessons learned" in other threads.

Thanks for your info. I was triangulating more-or-less toward what you have summarized. Let me see if I've got two things right:

1) If I were to "break" an IRA CD with the credit union, I'd incur their interest penalty (in this case it is 180 days interest I think). On top of that, I'd have to do a c-to-c transfer of the cash proceeds back to another IRA, if that's even logistically possible, to avoid being hit with a taxable withdrawal of the entire amount reported to the IRS by the Credit Union. It may be that the CU simply distributes the proceeds and I will have to do a 60-day rollover to another custodian and report this on taxes - not sure in that case if the CU withholds 20% tax or whatever it is. This all sounds rather cumbersome and punitive to me and not worth the trouble given the measly interest rates we're talking about in the first place.

2) If I let the IRA CD mature, I don't know if the credit union just automatically distributes the proceeds to me, if I don't choose to rollover to another of their CDs. I think there's a grace period that allows you to withdraw the funds before they are automatically rolled into a new CD. I suppose that provides some sort of window in which to do a c-to-c transfer if you want, but I'm not sure. But timing is everything. Again this seems rather awkward and cumbersome.

I can't believe it's so difficult to simply open an IRA at a bank or credit union so you can buy their dammed CD. But maybe it is.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Buying CDs in Vanguard IRA brokerage account?

Postby john94549 » Sat Dec 29, 2012 12:30 am

Browser wrote:
1) If I were to "break" an IRA CD with the credit union, I'd incur their interest penalty (in this case it is 180 days interest I think). On top of that, I'd have to do a c-to-c transfer of the cash proceeds back to another IRA, if that's even logistically possible, to avoid being hit with a taxable withdrawal of the entire amount reported to the IRS by the Credit Union. It may be that the CU simply distributes the proceeds and I will have to do a 60-day rollover to another custodian and report this on taxes - not sure in that case if the CU withholds 20% tax or whatever it is. This all sounds rather cumbersome and punitive to me and not worth the trouble given the measly interest rates we're talking about in the first place.

My response: If you do a c-to-c OUT with regard to an operative (i.e., not-yet-matured) IRA CD, you just check the box "transfer immediately." If you don't do a c-to-c, and break an IRA CD, all heck could break loose. I wouldn't know. I've never done it. Check with the bank or CU as to what they'd do, report, withhold, etc. Even if you do the rollover (which would be indicated on your 1040 as such), it would/could be cumbersome. For all I know, they might withhold not only the 10% penalty (which I suppose you could try to get back, somehow, after the rollover) but also whatever income tax withholding is required by the IRS. I yield to the tax experts on this, as I've never even contemplated it.

2) If I let the IRA CD mature, I don't know if the credit union just automatically distributes the proceeds to me, if I don't choose to rollover to another of their CDs. I think there's a grace period that allows you to withdraw the funds before they are automatically rolled into a new CD. I suppose that provides some sort of window in which to do a c-to-c transfer if you want, but I'm not sure. But timing is everything. Again this seems rather awkward and cumbersome.

My comment: You'll get a notice 30 days or so before maturity. If you do nothing, the CD will renew, usually at the then-effective rate for that term of years. Yes, there is a grace period, usually 7 to 10 days. If you are really, truly, on the fence at that time, the best option is to roll it into the absolutely shortest IRA CD offered, and keep looking.

I can't believe it's so difficult to simply open an IRA at a bank or credit union so you can buy their dammed CD. But maybe it is.

My comment. It's a learning experience the first time or two. Once you get the hang of it, it's (relatively) painless.

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Re: Buying CDs in Vanguard IRA brokerage account?

Postby thebogledude » Sat Dec 29, 2012 1:29 am

[del.]
Last edited by thebogledude on Sat Dec 29, 2012 1:50 am, edited 1 time in total.
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