withdrawal can erase earnings, drain principal|
Laura Bruce Bankrate.com||
few certificates of deposit in your portfolio is a good way of investing cash,
as long as you hold them to maturity.
Cash them out early and you'll
likely pay early-withdrawal penalties.
When buying a CD at a bank, the banker will remind you of the
early-withdrawal penalty. But it can be a lot like hearing the side effects of
a prescription drug being touted in a TV ad.
All you really
hear is, "Ask your doctor about Sneezeless, it will make your allergy symptoms
go away." The fast-talking mumble jumble about "may cause hallucinations,
sore feet and pimples" gets lost in the euphoria of knowing you won't sneeze
You may focus so much on the interest rate and term
of a CD that you don't pay enough attention to the chatter about how much money
you'll give up if you cash the CD early.
Federal law requires
a minimum penalty of seven days interest for early withdrawal on any account classified
as a time deposit. Since the law doesn't set a maximum penalty, banks are free
to, and usually do, charge much more.
It's not unusual
to see the following penalties:
CD term ||
Interest penalty |
| 30-days ||
All interest |
| Two to 18 months ||
Three months |
| Two years
or more ||
Six months |
Some institutions levy
even stiffer penalties. Chase Manhattan charges 180 days interest for early withdrawal
on a 12-month CD.
And it's not just mega-banks that charge
high rates. Community Savings, based in Riviera Beach, Fla., charges six months
interest for early withdrawal of any CD with a term of more than one-year.
count on your money
Banks have a vested interest in making sure you
don't yank your money out from under them.
"We view CDs
as one of a number of very important investment tools, not only for the safety
and soundness of a financial institution, but also for the better returns than
a money market and less risk than the stock market," says Dave Huiskens,
first vice president at Detroit-based Comerica.
offsetting the security and the slightly better yield is the fact that the bank
is looking to keep those funds around and share in the profitability."
banks, such as Comerica, don't state the specific penalty at the time of purchase.
The penalty will be determined using a formula driven, in part, by the maturity
point of the CD, according to Huiskens.
"The earlier the
withdrawal is made in the term, the larger the penalty," he says. "The
current market rate at the time of withdrawal would also be considered."
worse than forfeiting interest you've earned? Forfeiting interest you haven't
Suppose you bought an 18-month CD at Chase and decided
to cash it out after four months. You would have to pay six-months interest even
though you've only earned four. That means you're digging into the principal you
paid for the CD.
On the other hand, early withdrawal penalties
are sometimes waived.
"There are some exceptions," says Theresa Brooks
of Community Savings. "It's waived if someone dies or is declared mentally
incompetent. Most institutions will also waive it on an IRA or 401(k) for anyone
over 59 ½.