How to Minimize CD Early Withdrawal Penalties
Ten years ago, opening a certificate of deposit required $5,000 and an hour at the bank. Today, you only need $1 and five minutes. Take advantage of that to help minimize early withdrawal penalties on CDs.
One of the biggest risks to saving with a CD is that you may need the money before it matures. On CDs with maturities of less than twelve months, the penalty is usually between 30 and 90 days of interest (one to three months). On CDs with maturities of twelve months or more, the penalty is usually 180 days (six months) of interest. If you close a CD within three months of opening it, you could end up losing money.
The solution? Divide your savings into multiple CDs so that if you do need access to the funds, you don't have to withdraw the full amount of your savings all at once. This lets you take advantage of CD rates while mitigating one of their biggest risks.
For example, let's say you have $5,000 to save. You should open five $1,000 CDs so that if you need the money before maturity, you only have to cash in CDs in $1,000 increments (and thus pay penalty in the smaller increments). There is no additional financial cost to opening up multiple CDs, it'll just cost you time.
Have you used this strategy?
Jim writes about personal finance at Bargaineering.com.
Photo: paulcarnevale
Post a comment
Comments:
I'm confused.
Every bank I've ever dealt with (and the two I've worked for, one a local, the other a regional) have allowed you to withdraw a portion of the funds in the CD, with the penalty only being taken out of that amount.
Having worked behind the counter, all this strategy seems to do is create more paperwork for you, the CSR, and the deposit specialist who has to process it all.
You'd shouldn't get a cd if you can't afford to let it sit
CD rates are no better than a typical high interest savings account, like the ones offered by ING.
I simply do not see any reason to be buying a CD when I get the exact same rate with no risk at all.
Seriously. This is a question for those that know more than I do.... Why buy a CD?
_Am
Because CD rates are typically better than High Yield Savings rates. ING is offering 1.40% now on their Savings, while I just opened a 1 year CD at my CU at ~2.75%. You are also protected from the rate going down (which has been the trend lately).
@flyingember: Not everyone can afford to let it sit when an emergency arises.
There is more than one reason to take it out than "I can't afford it."
look for penalty-free cds. my bank, 5/3, offers them. you get to keep the earned interest if you pop the cd early.
This is rather dumb -- most Financial Institutions will charge a penalty on the amount you withdraw, not the amount of the CD. If you withdraw below the minimum deposit, you will then have to close.
Therefore, if you have a $5,000 CD and need to withdraw $1,000 (and the CD has a $1,000 minimum) you'll be penalized on 90days/180days on the $1,000.
If you have a $1,500 CD, and you need $1,000 you'll have to cash the whole thing in since it will be under $1,000 and pay a penalty on the entire amount.
Using the strategy as described here is not a good idea, "laddering" your deposits with different maturity dates so you'll always have cash flow is a good strategy.
I burn all my CDs at home.
Crap, call me if you have a CD that is locked in and pays over 5%. We can set-up a transfer of ownership. Then you will pay no early withdrawal fee and I will get more than 1-2% on my money.
@AreYouConfusedYet?HowAboutNow?: Then they can't afford to get a cd. Seriously though, it's better to split it up between cds and interest-bearing savings or money market accounts.
I dunno wouldn't it be better to just put your money in a online savings account like emigrant, ING, HSBC?
@unpolloloco: I agree. If there is the slightest chance that you might need the money soon, then a CD should be one of your last investment venues. There are plenty of other accounts that will let your money be more liquid without potential fees.
@unpolloloco: I have an extremely comfortable savings that I could live on for a long time if I needed to. If I'm hit by a car tomorrow and need to withdraw from CDs to cover the costs, does that mean I couldn't afford the CD back when I opened it, with my huge surplus of cash? By your logic, almost no one can afford a CD.
The way I get around this is I have 6 CDs, one rolling over each month. That way, if I need the money, I will have access to one CD penalty-free each month.
@chicagoandy: I didn't consider CDs until I watched interest rates plummet. I've been happily locked in to 3.5% until maturity, which is more than double what my "high yield" savings is getting now and for the relevant future.
A while ago, I read a similar strategy on Bankrate, but for a different purpose. It's called CD Laddering. Say you have $10,000. You'd get five CDs at increasing time periods:
$2000 @ 3mo
$2000 @ 6mo
$2000 @ 9mo
and so on
Provided rates are good. All your money isn't in a crappy-rate CD, and you don't have to wait a long time to access some of your money. Also, you can hunt around for smaller/community and online banks that may pay higher rates.
Some banks (I'm thinking BoA) offer what they call risk-free cd's, which allow you to withdraw early, no penalty, but the interest rate is lower than a regular CD. So if you can't be sure you won't need the money, but you want a higher interest rate and won't need to make frequent withdrawals, you can compromise.
Yeah, I just got a CD at Citibank at 4%.
sometimes you can rock the interest penalty & still make more money in the end. if you have money that you don't need access to & you just want a safe investment with a decent return, sometimes it makes more sense to go out for a longer term (3-5 years) & take the penalty when rates rise.
this generally makes more sense in a market where rates have stagnated or are down-trending. take shorter terms when rates start to rise so you don't get left behind.
@acvicari: I have a BOfA Risk Free CD which I use to store the bulk of my money until I'm absolutely sure I need it. The interest isn't that great at 1.75% but considering regurlar longer terms CD rates at BOfA are now at 1.25% I feel I got a great deal. The no penalty for early withdrawl (so long as the money is first transfered to another BofA account) is a great addition as I just needed to pull cash out to repay my student loans. Compared to my Wells Fargo 6th month CD at a whopping 0.75%, the risk free option at BOfA seems to be the way to go for me right now.
I did this recently with $10k. I put it into 2 CD's one 7 month at a decent rate the other a 3 month at a somewhat crappy rate (looks pretty good now).
I ended up breaking the 3 month early to buy a new computer and monitors. Still waiting on the 7 month to mature. It's a bit of hassle for your banker, but hey it's their job.
@silver-bolt: While this is frequently true, it is almost never that grainular. It is usaually <50K / 50K-99K / 100K+.
Quite frankly, if you are depositing >50K in one go, you aren't as likly to need to do an early withdrawal.
@gauden44: My credit union allows for a rate bump once during the lifespan of the CD. If the rate takes a big jump, I can bring my CD in-line, and I'm locked into the higher rate if they plummet on the market.
Let's take ING's short term rates for the illustration: 1.40% APY for savings, 1.65% APY for a short term (6-month) CD.
Until you hit about a 30% certainty that you'll make an early withdrawal sometime during the period, you should still go with the CD.
The data is shown here, via Google Spreadsheets:
[is.gd]
(Some values are truncated, but the calculations square.)
Arn't some CDs Interest rates calculated by the amount invested? So a bank would offer 5% on <5000, but 6% on 5000 to 10000. Would could lose out on some interest.