May 27, 2017

Avoid the Consequence of an Early Withdrawal Penalty on CDs

Early Withdrawal PenaltyA Certificate of Deposit is a great place to invest some of your hard earned money. But be aware that all of the positive aspects of CDs, the good interest rates and the extra cash built up in the account, may vanish if you decide to cash out on the CD before it has finished maturing. Cashing a CD before the maturity date is called an early withdrawal, and it can come with some heavy penalties.

Strong Consequences

In fact it is a Federal law that all CDs cashed out for early withdrawal in the first six days after deposit may be subject to a minimum penalty of seven days’ simple interest. Again, that is just the minimum penalty, and there is no maximum. It is up to each individual bank to decide withdrawal penalties, and some have been known to go up as high as a year’s worth of simple interest on 36 month CDs that were withdrawn early. For most banks the penalty depends on how long the CD term is for and how close to the deposit date you withdraw.

Think Before You Invest

These penalties are awful because not only are you not earning interest anymore, but you have to pay the remaining interest you would have earned if the CD hadn’t been cashed out early. This is why individuals should make certain that they have enough extra money for emergencies and unforeseen circumstances before they invest funds in a Certificate of Deposit account.

Avoiding Penalties

There are various cases and reasons why one might be able to get the early withdrawal penalty waived. If the CD owner pass away, or is acknowledged to be mentally incompetent, the penalties will certainly be removed. Many institutions also show leniency to elderly customers, as the penalties on IRAs or 401(k)s for those over 59 ½ will often be waived. There are two other instances when early withdrawal penalties may be removed.

A brokered CD is one that you purchase through a deposit broker. A big reason many people buy these CD types is because they come without withdrawal penalties. This is because you are selling the CD on a secondary market instead of cashing it out. The downside is that you have to sell for whatever you can get, and the return might be less than what you originally paid. But at least you have the cash you need without extra fees. The same principle works with 3-year CDs. If you sell at a time when the highest rate on the market is lower than your current rate, you will earn a premium. But if you are forced to sell when the market rates are higher than you current rate you will be letting it go for less.

Conclusion

Invest in a CDYour best bet before investing in a CD is to determine how long you can live without the money. Many people go straight for the high yield long-term plans because they offer the highest interest rates, but then later realize the term is too long and have to withdraw because the need the money back. If you are unsure or have any doubts you should probably go with a low yield short-term CD. The shorter maturity will also give you greater flexibility when it comes to reinvesting!