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CD Early Withdrawal Penalties

CD's are considered one of the safest investments in the market and at the same time they pay higher interest than savings accounts.

However, CD's have one disadvantage. Namely, they are designed to be long-term investment vehicles. This means that you cannot use the money from them to execute daily transactions as is the case with checking accounts.

CD Early Withdrawal Penalty

CD's deprive you from the possibility to make multiple withdrawals and deposits on daily basis. Instead, they have maturities, which if not followed may negate the benefits provided. The reason for this is that early withdrawal is subject to penalties.

Clients are informed about the amount of the early withdrawal penalty when the actual purchase of the CD is made. Many of the people get too enthusiastic about the money they will make on their investment and completely forget about the resulting fees that can be triggered in case the CD is sold earlier.

There is no fixed amount of penalty that applies to all banks. Generally, for accounts that are classified as a time deposit, the federal law requires a minimum fee equal to seven days of interest for any early withdrawal made. However, since no maximum level is set, the setting of the early-withdrawal penalty amount is up to the discretion of the bank. Thus, you should read carefully the documents accompanying your CD to see how much you will be charged for early withdrawals.

If the maturity of a CD is less one year, then the general practice is the charging of a penalty equal to 30 to 90 days of interest. As the maturity increase, the penalty grows as well. For example, CD's with maturities of more than one year are subject to more than 90 days of interest in case of premature withdrawal.

Some banks go a step further in their early withdrawal penalties by charging interest that hasn't been earned yet. So, for example you may have held a CD for five months and decide to withdraw it. Some banks will charge you a six-month fee for the early withdrawal. As a result your principal will suffer.

CD Penalty Waivers

There are some events, which if occur may free you from the penalty. Such events include:

  • Mental incompetence or other disability
  • Death
  • IRA or 401 (k) if you are above the age of 59 ½.

Additionally, some CD's are not subject to early-withdrawal fee, such as:

  • Brokered CD's
  • CD's offered by a deposit broker

Even if your case is not one of the above mentioned, you can still address the staff of the institution form which you have bought the CD. If it is a small one or you have good relationship with them you can ask for a penalty waiver.

Information about the exact eligibility for early withdrawal penalty waivers can be found directly from the institution's representative.

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