Exceptions to the Required Minimum Early-withdrawal Penalties

In some circumstances, you are permitted to allow an early withdrawal without imposing even the minimum early-withdrawal penalty specified in Regulation D. These circumstances are as follows:
  1. Where the time deposit is maintained in an Individual Retirement Account (IRA), in a Keogh (H.R. 10) plan, or in a 401(k) plan and the early withdrawal occurs within seven days after establishment of the IRA, the Keogh plan, or the 401(k) plan. However, the depositor must forfeit an amount at least equal to the simple interest earned on the amount withdrawn.
  2. Where the time deposit is maintained in an IRA, a Keogh plan, or a 401(k) plan and the individual for whose benefit the account is maintained is age 59½ or older or is disabled.
  3. Where two institutions in which the depositor maintained separate time deposits merge, causing the depositor’s time deposits to be underinsured, and the depositor withdraws the uninsured portion within one year from the date of the merger.
  4. Upon the death of any owner of the time deposit funds.
  5. Where the depositor is determined to be legally incompetent by a court or other administrative body of competent jurisdiction.
  6. Where the time deposit is withdrawn within ten days after a specified maturity date even though the deposit contract provided for automatic renewal at the maturity date.

[12 CFR 204.2(c)(1)(i), fn 1]

These are situations where you are permitted to allow an early withdrawal without penalty. You are not required to do so under federal law, but some states require you to waive the penalty in certain circumstances. The rule is simply that if you do allow an early withdrawal in one of these circumstances without imposing at least the penalty required by Regulation D, then the deposit will not be subject to higher reserve requirements because of your allowing the early withdrawal without penalty.