Q. Over the years, I’ve opened IRAs at various banks depending on which one was offering the highest-yielding CD. It’s gotten a bit out of control as I am nearing age 70-1/2, I’m thinking I should consolidate these as they mature. I think I have about 25 to 30 IRAs at over 10 banks, I’m not sure of maturity dates or yields as I have just left them to renew automatically. Do you think just selecting one bank to hold what would eventually be a rather large CD makes sense? My plan would be to have a check sent to me as the various CDs mature and then deposit the check into my IRA at the selected bank. I realize I’d need to make sure and deposit the check within 60 days of receipt, but I don’t think that would be problem if I select a local bank allowing me to just bring the check directly to them upon receipt. My big concern with my plan is not having the FDIC insurance if my account value goes over the limit, $250,000 correct? If I select a well known bank, should this be a concern? Overall, do you think my plan makes sense?
A. Your plan to consolidate your IRAs, especially prior to your required minimum distribution date (RMD), makes a lot of sense. I can’t imagine keeping track of that many IRAs, and since you are unsure of maturity dates and yields this indicates that you are having some trouble monitoring these IRA accounts. The auto-renewal feature is convenient, but you may find that your new maturity date ties up your money for five, 10 or even 20 years and at a rate much lower than you desire. I know of a recent instance where the auto-renewal feature of a client’s CD established a maturity date 10 years in the future with a rate of 1 percent. If she had let the CD renew with the new terms and wanted to redeem the CD before maturity, she would have had to pay an early withdrawal penalty.
You are correct that the FDIC insurance limit per insured bank for each account is $250,000. I suggest you open an IRA at a brokerage such as Schwab, TD Ameritrade, Scott Trade or Fidelity for a couple of reasons. The first reason concerns the FDIC insurance limit. If you want to continue to purchase CDs and the value of your IRA will be over $250,000, the brokerage account will allow you to purchase CDs from different banks within the one IRA account. This will also allow you to search for the best rates and select maturity dates that correspond with your RMDs and cash flow needs. You need to pay attention to the total value of all CDs purchased within the IRA from one bank and limit this value to $250,000 in order to maintain the FDIC insurance coverage.
Another reason the brokerage IRA account makes sense is due to a new IRS ruling concerning the once-per-year IRA rollover. This new rule will be enforced beginning Jan. 1, 2015. Only one IRA-to-IRA rollover is permitted during a 365-day period from any of your IRAs. Example: You receive a check from one of your IRAs on May 1, 2015, when a CD matures and within 60 days deposit that into another IRA. Another CD matures within an IRA on Oct. 1, 2015; if you receive a check, this may not be rolled to another IRA because the one-year period runs from May 1, 2015, to May 1, 2016. The October distribution will be taxable, and if the IRA owner was under age 59-1/2, it would also be subject to a 10 percent early withdrawal penalty.
The best way to move money from one IRA to another is via a direct trustee to trustee transfer. When ready to transfer, you complete transfer paperwork from the custodian to which you want to transfer and send this to them with a copy of your latest statement from the IRA you are transferring. If you are transferring CDs, you can indicate whether you want to redeem the CD immediately with the understanding that penalties may apply for any withdrawals prior to maturity or redeem at maturity. If redemption at maturity is desired, submit the transfer paperwork a month before maturity and inform your bank not to roll over the CD to a new term. There is no limit on the number of direct transfers between IRAs.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624