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CD Penalties: What is a Certificate of Deposit CD Penalty?

CD Penalties: What is a CD Penalty? Introduction:

Certificate of Deposit accounts are relatively safe investments as long as investors abide by the terms in their agreement. They can receive 100% of their principle and earned interest once the CDs mature. In those situations when investors have to close their cd accounts or withdraw money, investors may have to pay cd fees. These fees can take away from the interest and the principle investment. Financial institutions do charge penalties that investors should be prepared to pay when they close accounts or withdraw money from their CDs.

Ways Banks Charge Penalties on a Certificate of Deposit CD

Investors charge penalties in various ways. Information regarding penalties should be discussed at the time that the CD accounts are opened. Investors should take a close look at the paperwork regarding their CDs for additional information on the penalties for their CDs.

The most common penalties charge investors a portion of their interest earned. Investors may receive penalties of a few months of interest up to two years of interest. For example, a 5-year CD can incur penalties for two years of interest when investors withdraw money from the CD after the third year. Investors are left with a little over half of their interest when this happens.

Issuers may charge penalties of non-accrued interest in some cases. This is a charge of the potential interest the account would have made had it been allowed to reach maturity. This type of penalty can cost investors some of their principle investment. If investors close a 6-month CD account after only 3-months, issuers may charge the investors the 3-months of interest earned plus three months of non-accrued interest. Investors leave the investment with less than their original principle deposit in this case.

Issuers may charge hefty fees of 10% to investors who withdraw funds from IRA CDs. Investors agree to keep the money in the accounts until they are 59 ½ years of age. Withdrawals before this time result in 10% penalties. Imagine having $100,000 invested in an IRA CD. Closing that account may cost the investor $10,000 in penalties. Investors lose a substantial amount of their original investment.

Some financial institutions charge a percentage of the interest on the withdrawal amount, and other may charge a percentage of current and potential interest. For example, investors who withdraw $5,000 from a CD may receive penalties of 50% of the current and potential interest. Depending on the amount of the current principle, investors can stand to lose hundreds or thousands of dollars in interest to make this withdrawal. The percentage penalties vary by the amount of money withdrawn, and it can cost investors most of their interest.

Perhaps one of the most expensive ways that investors charge penalties is by charging investors a fixed penalty amount and a percentage of their interest. For example, issuers may charge investors a $75 charge plus half of their accrued and non-accrued interest for a withdrawal. Investors have to pay a good portion of their principle in order to make the withdrawal.

How to Avoid Certificate of Deposit CD Penalties

Investors do not have to incur penalties on their withdrawals if they follow a few easy steps:

  • Do not withdraw money or close accounts early. Both withdrawing money and closing the account may create penalties that investors do not want to pay. The maturity date is the key to keeping all of the principle and earned interest on the CDs.
  • Do choose terms with caution. When investors open these accounts they are agreeing to keep the money in the accounts until the term are reached. Investors should choose terms that are short if they expect to use the money soon. Investors may also want to look into opening CDs with no penalties for early withdrawal or closing the accounts.
  • Do negotiate penalties when opening accounts. High deposits may give investors a greater advantage. Issuers want investors’ money to invest in their banks and credit unions so they are more likely to invest the money on the terms of the investors.
  • Do ladder investments to receive higher returns. Investors who ladder their investments get the benefit of having more than one term and more than one interest rate on their investment. Investors decide how to set up their ladder so that they do not have to receive penalties for withdrawing money.

Investors do not want to pay penalties for closing their accounts or withdrawing money from their CDs. There are many ways that investors can get around paying these fees so that they do not lose any of their principle and interest payments.

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