cds

Early CD withdrawal penalizes principal

 

 

Intro: Have money in a CD, but in a pinch for cash? CD early withdrawal penalties can really take a bite out of your earnings and in some cases cost you some of your initial investment. Bankrate.com's 2012 early withdrawal survey sheds light on the penalties you could face if you decide to withdraw your money before maturity.

Take double box:

Kristin: Greg McBride, senior financial analyst with Bankrate.com is here to tell us what the typical early withdrawal penalties are.

Greg: Kristin, just as in our 2010 survey we found that the typical penalty for CDs less than one year in maturity is to forfeit 3 months worth of interest. And for CDs for one year and longer, the most common penalty means giving up 6 months of interest. This is no different for CDs held in your retirement account either, if you cash them in prior to maturity.

Kristin: Ok, what happens if you have to withdraw before you've earned enough interest to satisfy the penalty - for example, you have a one year CD that carries a six-month interest earnings penalty, but you cash it in after just 4 months?

Greg: This is a very important point. In 97% of the cases, the financial institution will dig into your principal to satisfy the penalty. You're investing in a CD because you don't want to risk losing any of the money, but that is exactly what can happen in order to cover penalty.

Kristin: Now, in the survey you also say something interesting about 3-month CDs in particular - what was that?

Greg: Between the combination of uncompetitive yields and early withdrawal penalties, there is little appeal to 3-month CDs. The top-yielding 3-month CDs fell well shy of the top-yielding savings accounts where you can get to the money at any time. With the 3-month CD, if you needed to cash in early, more than half of the time the penalty will erase all the interest and take some principal.

Tag: Just remember, before you invest in a CD, be certain you live without the money until maturity and aware of the penalty if you can't. For more information on CD early withdrawal penalties - visit Bankrate.com.

 

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