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Avoiding Early CD Withdrawal Penalties

By Brian O’Connell
A growing number of financial services firms are waiving the early withdrawal penalties on CDs. E Loan, for example, waived such fees in March and Bank of America’s (Stock Quote: BOA) Risk Free CD enables investors to withdraw funds prior to the maturity date without incurring any penalties or fees.

But what if your bank plays hardball when you try to cash out of a CD?

For starters, incurring early withdrawal penalties on CDs are the rule, and not the exception. Like any other bank product or service, certificates of deposit fees are considered a profit center by banks, so many despise waiving the penalties for early withdrawal.

The facts look like this. By law, banks can charge a minimum fee of at least seven days of interest if you withdraw money from your CD within six days of buying it (i.e., the day of deposit). But if you take money out of your CD after six days, banks can pretty much set their own penalty and fee amounts, with no limit on the amount they charge.

In other words, cash yourself out early of a one-year CD and risk losing three or four months interest. For two-or three-year CD’s, prepare to pay a steeper price, maybe even a fee of six months of interest. In fact, it’s actually possible to owe more than the interest you’ve earned on a CD if you take cash out early.

So let’s say you have a two-year CD and you’ve cashed out the entire amount within 90 days of the original date of deposit. If the bank issues an early withdrawal fee of six-months interest, you’ll wind up cutting your bank a check on your CD, instead of the other way around.

Though, there are some situations where banks are required to waive early withdrawal CD penalties. For instance, if you die before your CD’s maturation date, your estate will escape any early withdrawal fees. Only an optimist would call that a silver lining, but there are other, less-depressing instances where banks are forbidden by law to assess early withdrawal CD fees. For example, if you’re over 70-and-a-half years old, and your CD is an individual retirement account, banks can’t penalize you if you take cash out of your CD to satisfy a minimum annual withdrawal.

Of course, there’s no rule that says you can’t go to your bank and ask them to waive any early withdrawal fees. Banks, and especially credit unions, are amenable to giving you a pass on CD penalties if you have plenty of assets in the bank and you emphasize the fact that you’re willing to explore other banking options if those early withdrawal fees aren’t waived.

Lastly, if early withdrawal fees are simply not a choice, CD investors have options.

More and more banks are coming out with “no-penalty” CDs, which provide a guaranteed interest rate as well as easy access to your cash. But, since banks don’t usually like giving you easy access to your cash, interest rates on no-penalty CDs are usually significantly lower when compared to regular CDs.

In the end, perhaps the best move is to not raid your CD account at all. But if you do, at least know where you stand.

To find our how much interest you can earn on a certificate of deposit, give the sbup CD calculator a try.

Approximate penalty amounts for early CD withdrawals:

CD Maturity               Early Withdrawal Penalty

0-1 Year Maturity        Three months interest

1-5 Year Maturity        Six months interest

5-years-and-up           Nine months interest

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