Thursday, July 23, 2015

First bank-to-bank IRA transfer from a maturing IRA CD

I recently completed my first transfer from a maturing IRA CD into a new IRA CD at another bank, and everything went very smoothly. There are two reasons I would consider doing such a transfer: 1) better rates at another bank or credit union; 2) stay within FDIC/NCUA insurance limits. Both were applicable in this case. If neither was a factor, I would have just rolled the maturing CD into a new CD at the current bank. Unless you own any IRA CDs, and you may eventually want to transfer the balance to another bank or credit union when they mature, there is no need to continue reading; there are no other investment lessons here.

As I've explained in previous blog posts, I think the risk/return trade-off of good CDs purchased directly from banks or credit unions ("direct CDs") is better than that offered by typical bonds or bond funds, so I have about 70% of my fixed-income investments in direct CDs, with about 25% in bond funds and 5% in cash. Nothing has changed enough to change my mind about this, so as my CDs mature, I'll probably buy new CDs to replace them, as I'm describing here.

The CD that matured was a 4-year "raise-your-rate" IRA CD at Ally Bank, with an interest rate of about 2%. The new CD is a 5-year 2.25% CD at Synchrony Bank with an early withdrawal penalty (EWP) of six months of interest. Ally Bank currently offers a 5-year CD at 2.00% with an EWP of five months of interest, so not bad, but not quite as good as the 5-year CD at Synchrony Bank.

As mentioned above, staying within federal deposit insurance limits is one reason to do an IRA transfer from one bank or credit union to another. Deposit insurance is provided for banks by the Federal Deposit Insurance Corporation (FDIC), and for credit unions by the National Credit Union Administration (NCUA). The FDIC and NCUA insurance limits are the same.

The federal deposit insurance limit for a retirement account, like an IRA, is $250,000 per bank or credit union. There is no way to increase this limit, unlike a joint account,  trust account, or payable on death (POD) account, for which the limit can be increased to $500K to $1.25M, depending on the ownership category and number of beneficiaries (for trust and POD accounts). So anyone who would like to invest more than $250K in direct CDs must use more than one bank or credit union to be insured against bank or credit union failures.

If you invest $221K at 2.25% in a 5-year CD and reinvest the interest in the CD, you will just barely exceed the $250K limit when the CD matures. If you want to stay within the FDIC/NCUA insurance limit, you will need to transfer some of the money to another bank or credit union when the CD matures.

I called Synchrony Bank about a month before the Ally Bank IRA CD matured, and talked to a banking representative about what I wanted to do. He opened the new IRA CD for me right then, and gave the CD account number to include on the IRA transfer form. I put this number in the Account Number blank in the IRA Owner Information section and also in the Transferee Account Number blank in the Transfer Authorization to Present IRA Trustee/Custodian section of the IRA transfer request form.

Although I've done many direct IRA transfers from Vanguard and Fidelity to banks and credit unions to buy CDs, this is the first bank-to-bank IRA transfer I've done, and the first from a maturing CD. The same one-page traditional IRA transfer request form is used, but the way I filled it out was slightly different. Incidentally, Ally Bank and Synchrony Bank use the exact same traditional IRA transfer request form. You always use the form provided by the receiving trustee or custodian, which in this case was Synchrony Bank.

Note that I am discussing a traditional IRA transfer; a different form is used for Roth IRA transfers. The forms are essentially identical, so I'm not sure why a different form is used, but you obviously want to use the form specified by the bank or credit union. All of Synchrony Bank's IRA-related forms are here.

The IRA transfer request form provides various choices for how much to transfer and when to transfer it. One of the options is to transfer the balance from a specified account number on a specified maturity date, and this is the choice I used for the first time.

I checked the box to transfer "Only the balance in these account(s): #_____________, #____________, #____________", and entered the account number of the maturing Ally CD in the first following blank (each CD has its own account number). I also checked the box to "Please transfer the assets ... At maturity date of ____________", and entered the CD maturity date in the following blank. I wasn't sure it would work as expected, but it did, and that's really why I'm writing this piece--so others in this situation will know that this can work.

Note that although there are three blanks for account numbers, there is only one blank for maturity date. I asked a Synchrony Bank representative if I could somehow use the form to transfer the balances from more than one maturing CD, because I have another Ally Bank CD maturing a month after the first one, and would have preferred to use the one form to have the balances of both maturing CDs transferred to Synchrony Bank. I was told that I could not do this.

Ally Bank requires a medallion signature guarantee on the IRA transfer form, and I got this (for free) from my local Fidelity office. You probably can get a signature guarantee from your local bank or credit union. I'm sad that Ally Bank requires this, since it requires extra time and effort. Neither Vanguard nor Fidelity has ever required this for the partial IRA transfers I've done out of my IRA accounts there, and a  Synchrony Bank representative told me that they do not require it either. I like Ally Bank, but this is a strike against them.

It doesn't look like there's room on the form for a signature guarantee, but there is. Fidelity put it in the bottom-right part of the Transfer Authorization to Present IRA Trustee/Custodian section.

I completed the IRA transfer request form and mailed it to Synchrony Bank at least two weeks before the CD maturity date, figuring this would be plenty of time for the form to arrive at Synchrony Bank, have them complete the form, mail it to Ally Bank, and for Ally Bank to do whatever internal processing they needed to do before the CD matured. I was tempted to call Synchrony Bank and Ally Bank to make sure that they had received the form in time, and that everything was progressing as expected, but decided instead to just give the process a chance to work. I did log onto my Ally Bank account on the maturity date, and verified that the CD showed a $0 balance, and that the transaction history showed that the transfer had been done. I also received a secure message from Ally Bank, including a copy of the check and a letter to Synchrony Bank verifying the transfer.

If you have multiple CDs maturing within a few months, you may prefer to have the maturing CD proceeds deposited into an IRA savings account at the same bank or credit union, and then do a single IRA transfer from the IRA savings account to a new CD at the other bank or credit union. This will require filling out fewer IRA transfer request forms, and in the case of Ally Bank or another bank or credit union that requires a signature guarantee on the form, fewer trips to get the signature guarantee. At current rates, you'll earn about 1% in the savings account for a few months vs. 2.25% in a good CD, so not a great loss, and maybe worth reducing the time and effort involved in doing multiple transfers. I would just be sure that you don't exceed the FDIC/NCUA insurance limit of $250K in your IRA in the meantime.


  1. Thanks Kevin!

    I've been logging in from time to time just to see if you've added anything…I just happen to be right in the middle of adding to my ira account. And this will take me over $250K. I had no idea that FDIC coverage was different for IRA accounts and the people at my bank that I have been speaking to didn't know this rule either….So if not for you, I would have put this money at risk without ever knowing it!

    Thank you!

    P.S. Would love to see more posts from you…I've seen you participate in Bogleheads sometimes and have learned to trust what you have to say….

  2. Thanks for the kind words.

    Each FDIC/NCUA ownership category has its own coverage, and $250K is the basic coverage amount. The coverage is the same for an IRA as for an individual account. So you get $250K for an IRA and $250K for an individual account at any one bank or credit union (CU).

    But some ownership categories look at the number of owners or beneficiaries. So a joint account receives $250K of coverage for each account owner (so typically $500K for spouses), and trust and POD accounts receive $250K per beneficiary, with some limitations.

    If you sign up for the email updates, you won't have to visit the blog to check for new posts (admittedly rare these days).

    I'm on Bogleheads many hours most days, and post a lot more there than here, because I get into more complicated topics there, and know I'm directly addressing particular interests of people who are actively interested in investing topics. Here I tend to cover more of the basics, or things that I think might be of interest to someone I personally know, but possibly also others.