Q&A: IRA interest rate terms

Dear Liz: I went to renew my IRA certificate of deposit and the bank officer suggested that I renew at the greater rate being offered for a five-year term (about 1.5% APR) rather than the lower rate for a one-year term (about 1% APR). She explained that since I am over 59 1/2, I can close the account at any time and roll it over to a new IRA should rates rise (for example to 1.75% in 15 months) with no penalty whatsoever. Is this true?

Answer: You don’t have to close and reopen IRAs when a CD matures or you want to change investments. The IRA is the bucket that holds your investment, not the investment itself. You also should be skeptical about claims that you would pay no penalty for early withdrawal. Not only are such penalties the norm, but a Bankrate survey found 9 out of 10 banks won’t just require you to forfeit the interest but will dip into your principal to pay the fees if necessary. The bank may offer a one-time opportunity to lock in a higher rate; if that’s the case, you should get the details in writing as well as the penalties if you have to withdraw the money prematurely.

In fact, any time someone pitches you an investment for your retirement funds, you should ask a lot of questions and get every detail and promise in writing. If the pitch is coming from someone who will profit from your investment — which is often the case — you should consider running it past a neutral third party such as a fee-only planner.

By the way, the Federal Reserve has signaled that it’s considering raising interest rates this year. That’s no guarantee that it will, but locking up your money now is a gamble.

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  1. Sharon Brown says

    Dear Liz,
    I have been informed that I will be losing my job in June. I have been with the company for 6 years, will be getting a small pension and I also invested in a TDA. When I leave I will still have unpaid obligations that will require me to obtain another job as I work 7 days a week. Do you think it would be to my advantage to use the money that I get to pay off my debt. I am 60 years young and saving has not been the easiest. I have about 35 thousand coming to me. This is just a part of what I have saved for retirement. What do you think.

    • Liz Weston says

      If you don’t have much saved at 60, you need to be really careful with the money you get. I’d suggest hiring a fee-only financial planner (www.garrettplanningnetwork.com) who charges by the hour to look at your situation. Another resource is the National Foundation for Credit Counseling which can evaluate your debt, but before you sign up with them you should also consult a bankruptcy attorney. Good luck.