Q. My bank says when I take my annual Required Minimum Distribution (RMD) from my Certificate of Deposit (CD), I would have to pay the bank a penalty. My accountant friend says the bank can make whatever rules it wants. I disagree. I say after 59 1/2, I can take out all I want without penalties, but I would have to pay taxes. Am I being Bamboozled?
A. We don’t think you’re being Bamboozled.
Instead, we think you’re misunderstanding the penalty being imposed by the bank.
When you take out more than the RMD, you’re probably incurring a penalty for early withdrawal from the CD, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
“Nearly all banks will levy a penalty, but if necessary they will dip into your principal to cover the fees if you have not earned enough interest yet,” she said. “This penalty is typically a certain amount of interest based on the term of the CD.”
She recommends you go to your bank and ask for the bank’s policy on excess withdrawals and how the penalty is calculated.
Many banks have a minimum penalty amount, she said, and there are several ways they may calculate it. It could be assessing the penalty only on the money withdrawn on a monthly basis, or calculated as a penalty on the entire balance, or calculating the penalty on a daily interest — rather than monthly — basis.
D’Agostini said CDs are issued for a set amount of money, for a fixed amount of time. The term lengths typically range from six months to five years, and the longer terms generally give more favorable rates.
“CDs generally pay more interest than you would receive in a savings or money market account and when shopping for CDs, you should consider a financial institution that is paying higher rates with better terms,” she said. “You should also assess your financial needs for the period of time until the CD matures, so that you don’t commit more to the investment than your RMD would allow.”
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