Two different things called a penalty can reach the same withdrawal, and they answer to different bodies of law. The one most people mean is the tax code's: an additional 10% tax on a distribution taken from a retirement account before age 59½ unless a statutory exception applies, the early withdrawal penalty imposed under Internal Revenue Code section 72(t) and reported on Form 5329 or, where the payer's Form 1099-R already codes the distribution as early, directly on Schedule 2 of Form 1040. The other is the bank's: the charge in the deposit agreement for taking money out of a time deposit before its maturity date, commonly stated as a number of months of interest. Neither one substitutes for the other. Cashing a five-year CD in year two at age 50 can trigger both, and reaching 59½ resolves only the tax half.
Federal deposit regulation contains a set of reliefs that are narrower than they look, and misreading them is the single easiest error to make here. Regulation D requires a time deposit to carry a penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit, and again within six days after each partial withdrawal. That is the only penalty federal law requires, and a footnote to the definition lists six situations in which even that one need not be imposed. Two of the six are retirement-specific. The first covers a time deposit maintained in an IRA and paid within seven days of the account's establishment under 26 CFR 1.408-6(d)(4), or maintained in a Keogh plan or a 401(k) plan, "Provided that the depositor forfeits an amount at least equal to the simple interest earned on the amount withdrawn". The second covers an institution paying an IRA, Keogh or 401(k) time deposit "when the individual for whose benefit the account is maintained attains age 59 1/2 or is disabled (as defined in 26 U.S.C. 72(m)(7)) or thereafter". The other four have nothing to do with retirement: federal deposit insurance lost through the merger of two insured banks, for a year from the merger; the death of any owner; a determination of legal incompetency; and a withdrawal within ten days after a maturity date under an automatic-renewal contract.
Read the footnote's own opening clause carefully, because it is where the misreading starts. A time deposit "may be paid during the period when an early withdrawal penalty would otherwise be required under this part without imposing an early withdrawal penalty specified by this part". What is relieved is the penalty this part requires, in the narrow window in which it requires one. Nothing in it caps, cancels or overrides the months-of-interest charge in the bank's own deposit agreement, and nothing in it touches the tax code. So the accurate sentence is that federal deposit rules stop requiring a penalty in these cases; whether one is still charged is a question for the account agreement, and a bank remains free to write a contract that charges it. "The CD penalty disappears at 59½" is a plausible-sounding statement that the regulation does not support.
A maturity date and a required minimum distribution are set by different clocks, and the arithmetic of putting them in the same account is worth doing before signing. RMDs are annual once they begin. A CD term is a single block. If a traditional IRA holds one long CD and nothing else, the year an RMD comes due may be a year the CD is not payable, so the only ways to take the distribution are to break the CD and pay whatever the agreement charges, or to fail to take it and face the excise tax on the shortfall. Neither regulator states this as a rule, because it is not one; it is what follows from two schedules that do not consult each other. Laddering maturities, or keeping the RMD-sized slice outside the CD, is the ordinary way around it.
Two smaller points that get lost. Deposit insurance for an IRA CD runs through the FDIC's certain retirement accounts ownership category rather than the single-account category, so the retirement money has its own $250,000 limit at that bank rather than sharing the depositor's ordinary one. And an automatic-renewal clause behaves inside an IRA exactly as it does outside one: a matured CD rolls into a fresh term at the rate then on offer unless someone acts within the grace period, which matters more here because retirement money is often left alone for years at a time.
