CDs and Required Minimum Distributions

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bikechuck
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CDs and Required Minimum Distributions

Post by bikechuck » Tue Sep 19, 2017 9:57 am

After my recent retirement I am restructuring and simplifying my portfolio. Nearly all of my investments are in tax advantaged investments and I will be gradually moving funds from my 401K(s) to IRAs.

I prefer individual CDs or at least some individual CDs to the total Bond Market funds. However I am not sure if they make sense once you get to the age where you need to begin taking RMDs.

Am I correct in thinking that I would be forced to liquidate individual CDs in my IRA when I get to the age where RNDs kick in? How does this work and can it be managed in a sensible manner?

jebmke
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Re: CDs and Required Minimum Distributions

Post by jebmke » Tue Sep 19, 2017 10:01 am

If you don't have them scheduled to mature when you are forced to take the RMD you would have to sell, I think. The R in RMD means required.

If I had CDs in my IRA I would schedule the maturity to match the RMD amount (maybe a little over - if there was a bit of excess coming due I'd just park it in a short term bond fund).
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123
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Re: CDs and Required Minimum Distributions

Post by 123 » Tue Sep 19, 2017 10:08 am

You can always establish a ladder of CDs with one or more maturing each year to accommodate RMDs (brokered CDs).

If you have IRA CDs held directly with banks it is possible with some banks to make penalty-free withdrawals to accommodate RMDs but this gets messy. If a bank allows such withdrawals from a CD it is often limited to the RMD required for only that account, if you've got funds elsewhere you have to handle the RMD for that part of your IRA separately. That gets old fast.
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Flobes
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Re: CDs and Required Minimum Distributions

Post by Flobes » Tue Sep 19, 2017 10:34 am

bikechuck wrote:
Tue Sep 19, 2017 9:57 am
Am I correct in thinking that I would be forced to liquidate individual CDs in my IRA when I get to the age where RNDs kick in? How does this work and can it be managed in a sensible manner?
Based on my experience, I do not believe you are correct that you will have to liquidate a CD to meet your RMD obligation.

I am subject to RMDs from an Inherited IRA. It is comprised of a small credit union CD with the lions share invested at Vanguard.

Each year, I withdraw total RMD (the sum of CD and Vanguard RMD amounts) from the CD. And I could take more. The CD lives on.

Credit Union explained that because it is an IRA with RMD obligations, CD qualifies for partial withdrawals, of any amount. A minimum $1000 must remain for the duration of the CD or early withdrawal penalties will apply.

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dm200
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Re: CDs and Required Minimum Distributions

Post by dm200 » Tue Sep 19, 2017 10:44 am

I think (not 100% sure) that whether there are penalties for early withdrawals from CDs/certificates for RMD depends on the individual bank or credit union. BEFORE buying a CD or certificate - I would make 100% sure that (if needed) I could deal with the RMD without penalty.

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Kevin M
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Re: CDs and Required Minimum Distributions

Post by Kevin M » Tue Sep 19, 2017 11:12 am

It's true that the terms and conditions for CDs at a number of banks and credit unions allow penalty-free RMDs from their CDs, but it's easy to set things up so you don't have to worry about this. As others have mentioned, you can just structure your CD holdings so that at least one CD of sufficient value matures each year, and you can take your RMD from that. It doesn't have to be brokered CDs--you can do the same thing with direct CDs.

You also mentioned that you prefer "at least some individual CDs", implying that you might have some fixed income in bond funds. You can keep enough of your fixed income in one or more bond funds in one or more IRAs, and take your RMDs from the bond funds. For IRAs, you can take the entire RMD from only one account if you want--you do not have to take an RMD from each account, as long as the total RMD amount is correct. So you could take the entire RMD from an IRA account with a bond fund, and leave the IRA accounts with CDs untouched that year. When a CD matures, you could do an IRA transfer, or perhaps a partial transfer, to a brokerage, and put the proceeds into a bond fund or money market fund until you're ready to take the next RMD. If you use brokered CDs, you won't even have to do the transfer.

This is not true for 401k accounts, for which the RMD must be taken from each account, but you wouldn't be holding CDs in a 401k. Once you rollover your 401k to an IRA, it becomes part of the IRA pot, and the IRA RMD rules apply. If you haven't done all your rollovers before RMDs kick in, you could just do a rollover into a bond or money market fund in an IRA, then take the IRA RMD from that.

I have about 75% of my fixed income in CDs, and will have to start taking RMDs in about five years. I'm not worried at all about structuring my IRA fixed income holdings to manage the RMDs. I also have an inherited IRA that I take RMDs from, but I happen to have some of my bond fund holdings and a money market fund in that account, so no problem.

Kevin
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dm200
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Re: CDs and Required Minimum Distributions

Post by dm200 » Tue Sep 19, 2017 12:24 pm

It is also usually (but not always) the case that interest on CDs can be withdrawn without the EWD penalty.

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Kevin M
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Re: CDs and Required Minimum Distributions

Post by Kevin M » Tue Sep 19, 2017 12:57 pm

dm200 wrote:
Tue Sep 19, 2017 12:24 pm
It is also usually (but not always) the case that interest on CDs can be withdrawn without the EWD penalty.
Also true, but if you're using the Uniform Lifetime Table for your RMD calculation, the minimum withdrawal percentage is 3.65% (1/27.4 at age 70), so with 5-year CD rates in the 2-2.5% ballpark, your interest alone won't be enough. But you could take your interest if your bank or CU won't allow penalty-free RMDs but does allow penalty-free interest withdrawals, and then supplement that from a bond or money market fund in another IRA account.

Another thought: PenFed and maybe a couple other credit unions or banks allow you to take penalty-free distributions of any amount if age 59 1/2 or older, as long as you keep a minimum balance of $1,000 to keep the CD open (in the case of PenFed). So if you happen to have CDs at one of these institutions, you could take your entire RMD from there. Unfortunately, PenFed CD rates have not been particularly competitive in the last few years.

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celia
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Re: CDs and Required Minimum Distributions

Post by celia » Tue Sep 19, 2017 1:31 pm

As Flobes implied above, you don't have to take the RMD out of every IRA you have:

You can take it from one of your TIRAs for all of your own TIRAs.
Your spouse can take it from one of his/her TIRAs for all of the TIRAs he/she owns.
You can take it out of one of the Inherited IRAs you got from person X to cover all of the Inherited IRAs you got from person X.
You can take it out of one of the Inherited Roths you got from person R to cover all of the Inherited Roths you got from person R.

As far as CDs, you can usually do a partial withdrawal and leave the rest of the CD invested.

You can also do re-balancing during withdrawal time by taking withdrawals from the over-weighted asset.

bikechuck
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Re: CDs and Required Minimum Distributions

Post by bikechuck » Tue Sep 19, 2017 1:54 pm

Thank You!

I learned something valuable from these responses as I had incorrectly understood that each IRA was subject to RMDS. I had no idea that you could aggregate them for purposes of determining your RMD and then make the withdrawal from any one of them.

That makes things much easier!

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AAA
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Re: CDs and Required Minimum Distributions

Post by AAA » Tue Sep 19, 2017 2:27 pm

Are we talking about bank CD's or brokerage CD's such as are sold by Vanguard? I believe that if you only have brokerage CD's in your IRA and you need to take a RMD, the whole CD must be liquidated. In such a case, as each CD matures, you might want to set aside an amount in a MM fund to cover the RMD before reinvesting the remaining proceeds in another CD.

Edited: In reviewing, I'm not actually sure about the "whole CD must be liquidated" part. I do believe, however, that at least some of it would have to be liquidated i.e. the brokerage firm couldn't just move part of it to your non-IRA account.
Last edited by AAA on Wed Sep 20, 2017 12:05 pm, edited 2 times in total.

zengolf2011
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Re: CDs and Required Minimum Distributions

Post by zengolf2011 » Tue Sep 19, 2017 2:29 pm

I include brokered CDs and short-term bonds along with core investments in TIRAs. I ladder the CDs based on my guesstimate of RMDs for each of the next three years. I take RMDs from the best performing asset(s) and stay within my target allocation bands. The purpose of my CDs and short-term bonds is to provide liquidity in years in which stocks and longer term bonds both perform poorly. If my core investments provide returns sufficient to fund RMDs, I withdraw from them and roll maturing CDs to new ones three years out. I try to avoid converting a paper loss to a realized loss. I hope this helps.

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