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Circular No. 75-98
July 14, 1975

American Revolution Bicentennial

Request for Comments on Issues Relating to Regulation Q
Following is the text of a statement issued June 26, 1975, by the Board of Governors of
the Federal Reserve System:
The Board of Governors of the Federal Reserve System today invited comment on a
number of issues relative to its Regulation Q (Interest on Deposits), in connection with
the offering by financial institutions of Individual Retirement Accounts.
Comment should be received by August 8, 1975. A similar announcement is being
made by the Federal Deposit Insurance Corporation.
The Employee Retirement Income Security Act of 1974 permits individuals not
covered by a retirement plan to establish an Individual Retirement Account (IRA) . In­
dividuals may deposit in these accounts, for retirement purposes, tax-deferred con­
tributions up to $1, 500 a year, or 15 percent of gross income, whichever is less. Such
accounts may be maintained at banks and other institutions.
In light of this Act, the Board on May 21 announced that State member banks not
exercising trust powers could nevertheless act as trustees of IRAs, in specified c ir­
cumstances, without prior Board approval. National banks had previously been
authorized to offer IRAs by the Comptroller of the Currency.
The Board invited comment on the following issues:
Would existing penalty restrictions imposed upon early withdrawal of funds
from a time deposit unnecessarily interfere with the distribution of all or part of an
IRA deposit balance when a participant retires or becomes disabled prior to the matu­
rity of the deposit in which his IRA funds are held?
— The Board's existing rules require that when funds subject to a deposit
agreement are withdrawn before maturity interest on the amount with­
drawn must be reduced to the passbook savings rate and, in addition,
three months' interest shall be forfeited.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

2. Is the 10 percent statutory penalty on early withdrawal of IRA deposits
sufficient to deter early withdrawal without the imposition of the penalties for early
withdrawal under Regulation Q?
3. In view of the intent of the Congress to encourage individuals to save for their
retirement, and since IRA deposits may remain on deposit for very long periods should
the existing ceiling on interest rates permitted to be paid on funds deposited in IRAs be
increased and should the existing differential between the ceiling interest rates for
savings institutions and commercial banks be eliminated? Further, should these ceiling
rates be competitive with rates offered by insurance companies and mutual funds that
also accept IRA deposits?
— Generally the differential on interest rate ceilings between commercial
banks and thrift institutions is one-quarter of one percent.
4. The Board would also like comment on the question whether disintermediation
(drainage of funds from one or more types of investment or savings) might occur due to
the potential for shifts of IRA funds from one to another type of institution or investment
in order to increase earnings.
5. Finally, the Board would like comment on the question whether new types of
deposit instruments should be created for IRA funds. The instruments under considera­
tion might have the following general characteristics:
— An instrument of which the rate of interest would be permitted to increase
over time, presenting an incentive, in the form of higher interest rate
earnings, for leaving deposits in place for longer periods.
— An "IRA Payout Certificate" into which an IRA participant nearing re­
tirement could convert an existing or maturing long-term deposit and
from which the depositor would receive periodic, annuity-like pay­
ments, with no or reduced penalty for early withdrawal, in exchange
for the depositor's undertaking to leave his IRA funds on deposit for a
specified period.
A copy of the Board's statement as submitted for publication in the FEDERAL REGISTER
is enclosed. Comments thereon should be submitted in writing to the Secretary, Board of Gover­
nors of the Federal Reserve System, Washington, D.C. 20551, to be received not later than
August 8, 1975.
Sincerely yours,
T. W. Plant
First Vice President

[REG. Q]
Requests for Public Comments Concerning
Individual Retirement Accounts

The Board of Governors, in conjunction with the other Federal

regulatory agencies, is considering the appropriateness of

amendments to Regulation Q (Interest on Deposits) (12 CFR 217) in light of
the recently enacted Employee Retirement Income Security Act of 1974
(Public Law 93-406) which, in part, provides for the establishment of
Individual Retirement Accounts (IRA*s).

Prior to consideration of specific

regulatory proposals, the Board desires to obtain a broad sampling of public
opinion on several issues raised by member banks offering IRA plans under
the Board’s existing regulations.
IRA's, established pursuant to § 408 of the Internal Revenue Code
(26 U.S.C. 408), are retirement plans which may be created by persons who
otherwise are not participants in existing pension plans.

The statute

provides that an individual may deduct up to $1,500 or 15 per cent of the
compensation includable in his gross income for the taxable year, whichever
is less, from his gross income in determining his Federal income tax.

In addition, earnings on the contributions to an IRA are not taxable until
distributed to the Individual.

Other provisions of the statute specify

when distributions may be made, impose a 10 per cent penalty for premature
withdrawal of funds, and establish conditions under
transferred from one trustee or custodian to another.

which IRA fundsmay be

is expectedthat

many IRA’s will be maintained at banks pursuant to trust or custodial
agreements created between banks and individuals.
The Board requests public comments on the following issues
relating to IRA's and Regulation Q:

Would existing restrictions of Regulation Q relating to withdrawal

of time deposits prior to maturity (12 CFR 217.4) unnecessarily interfere
with the distribution of all or a part of the IRA deposit balance when the
participant retires or becomes disabled?
The Board's existing regulations state that

where a deposit

is withdrawn prior to the maturity date of the deposit agreement, interest
paid on the amount withdrawn may not exceed the savings rate and, in addition,
three months of interest shall be forfeited. Consequently, IRA participants
who choose to invest their funds in time deposits with long-term maturities
in order to obtain higher rates of interest may incur a substantial interest
penalty if these deposit instruments have not matured when the individual
reaches retirement age (age 59 1/2 pursuant to the statute) or when the
individual becomes disabled and the IRA participant receives payment
of all or part of his IRA funds.

(A recent amendment to Regulation Q

exempts from the interest penalty provision any funds withdrawn prior to
maturity in the event of the depositor's death.)

In order to minimize the effect of the Board's existing interest
penalty provision upon payout at retirement or disability, the Board wishes
to receive comments on whether IRA participants and member banks offering
IRA plans should be required to structure the maturities of their deposit
agreements so that they come due at intervals coinciding with distribution
pursuant to the IRA agreement entered into with the bank.

Would such

requirements unduly complicate the functioning of IRA's and impose an undue
burden on individuals and banks in keeping track of maturing deposits and
in planning distribution schedules at retirement such as to discourage
participation in IRA offerings?
An alternative available under present regulations would be to
invest IRA's into savings deposits or deposits with short-term maturities
or notice requirement periods.

Under existing rate structures, however,

such action could result in a substantially lower overall rate of interest
earned on IRA funds than would be possible if instruments x^ith longer-term
maturities or notice period requirements were available.

Accordingly, the

Board is interested in soliciting the views of the public on the question
of whether an exception to the early withdrawal provision of Regulation 0
is necessary to facilitate distribution of these funds when the individual
retires or becomes disabled.

In view of the 10 per cent penalty for early distribution of IRA

funds, Imposed by the IRA statute, does the existing penalty for withdrawal
prior to maturity established by Regulation Q impose an unnecessary deterrent


such that an exception to the Board’s penalty rule should be considered
for all withdrawals of IRA funds regardless of v t e made?
Title 26 U.S.C. § 408 provides that where any distribution from an
IRA is made before the individual attains age 59 1/2 or becomes disabled,
the participant shall incur a penalty in the amount of 10 per cent of the
funds distributed.

The Boardfs present penalty rule is intended to enforce

the statutory prohibition against payment of a time deposit before maturity.
The Board is interested in comments on whether the 10 per cent penalty on
early distribution of IRA funds is sufficient to deter early withdrax^al of
IRA deposits such that the Board need not require member banks to impose
the Regulation Q penalty for early withdrawal when IRA deposits are
withdrawn prior to maturity.

In view of the intent of Congress to encourage individuals

to save for their retirement and in view of the fact that IRA deposits
may remain on deposit at financial institutions for very long periods
of time, should the existing schedule of ceiling interest rates that can
be paid by banks on IRA deposits be increased and should member banks be
permitted to pay interest on IRA deposits at rates that are equal to those
that may be paid by savings and loan associations and mutual savings banks?
Should these rates be competitive with those offered by insurance companies
and mutual funds that also accept IRA funds?
Due to the long-term nature of IRA deposits and due to the effects
of compounding, the 1/4 per cent interest rate differential that exists
between commercial banks and thrift institutions can result in a substantial

difference in the amount of interest a participant cdn earn on his IRA

Further, Congress intended that individuals be encouraged to

establish IRA's with a view toward accumulating assets sufficient to provide
them with funds for their retirement period.

Consequently, the higher

the rate of interest that may be paid, the greater will be the amount of
interest accumulated.

In addition, there is the question as to whether

the custodial or trustee nature of the IRA agreement places a fiduciary
obligation upon the IRA custodian or trustee to place IRA funds only in
institutions that may pay the highest rate of interest permitted by law.

The Board is also interested in receiving comments on the

effect of longer-term certificates on the stability of sources of funds for
member banks and thrift institutions and the consequent insulation from
disintermediation during periods of hiqh market interest rates.

The Board

requests comments concerning the potential for disintermediation brought
about by shifting of IRA funds among investment alternatives by trustees
and custodians of IRA deposits and due to ’rollover” of IRAfs from one
trustee or custodian to another.
Generallys trustees and custodians are authorized to place
funds in various types of investment.

In addition, participants are

permitted to "rollover” their IRA funds to another custodian or trustee
once in three years without penalty.

Accordingly, the Board is interested

in obtaining public comments on the potential effects that the opportunity
for such changes could have upon financial institutions.


The Board requests comment on the question of the creation of

new types of deposit instruments for IRA funds.

These instruments might

have the following characteristics :

The rate of interest permitted to be paid on the
instrument would increase over time such that
banks would be permitted to pay higher rates of
interest on IRA deposits that remain in the bank
for correspondingly longer periods of time?


An IRA participant nearing retirement would be
permitted to convert an existing or maturing
long-term time deposit to an "IRA Payout
Certificate" that would permit the depositor
to receive periodic payouts at no or reduced
interest penalty in exchange for the customer's
commitment to retain his IRA funds on deposit
for a specified period of time.

To aid in the consideration of this matter by the Board, interested
persons are invited to submit relevant data, views, or arguments in writing
to the Secretary, Board of Governors of the Federal Reserve System,
Washington, D.C. 20551, to be received not later than August 8, 1975.
material will be made available for inspection and copying upon request


except as provided in 12 CFR 261.6(a) of the Board's Rules Regarding
Availability of Information.
By order of the Board of Governors, June 26, 1975.

(Signed) Theodore E. Allison

Theodore E. Allison
Secretary of the Board


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102