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Early withdrawal can erase earnings, drain principal
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"A lot of people put their money into a CD for the highest available interest rate and then set it up for monthly withdrawal."

Early-withdrawal penalties are deductible on line 30 of tax form 1040.

There is another way to invest in CDs and possibly not pay a penalty for early withdrawal.

Brokered CDs, CDs bought through a deposit broker, are sometimes advertised as not having a penalty for early withdrawal. That's true in that no penalty is levied, but what you're doing is selling that CD on a secondary market and accepting what you get for it. You could get less than you paid originally.

Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group, Woodstock, Ga., says that when selling a CD on the secondary market your concern is the interest rate.

If you have a three-year CD at 5.5-percent interest and you want to sell at a time when the highest rate on a three-year CD is 4 percent, you'll get a premium for your CD. But if you're strapped for cash and have to sell when the current best rate on a three-year is 6 percent, there's less demand for your CD and you may have to sell it at a discount.

"It's a way to escape the early withdrawal penalty," says Flurry. "But the penalty may be better than what you can get on the secondary market. You're signing away penalty rights when you get a brokered CD.

"With every investment there's a benefit and a burden. Typically, you'll get a higher rate with a brokered CD. That's the benefit. The burden is if you have to cash it in early you have absolutely no idea what you'll be able to sell it for. At a bank you know the rules up front."

Nevertheless, Flurry says brokered CDs can be the best deal for people who buy and hold. If you know you're not going to need the money for two years, he advises checking out two-year brokered CDs - but don't plan on cashing in early.

Caution if it's "callable"
Here's a big, red flag when buying brokered CDs. Be extremely careful about buying a "callable" CD. These are most often offered through deposit brokers.

The CD may say "federally insured one-year non-callable." That means the bank that issues the CD can't call, or redeem, it for one year. But many callable CDs have very long maturities -- 10 years or more.

The U.S. Securities and Exchange Commission has been warning investors that some brokers are selling the CDs to senior citizens who may be confused by "one-year non-callable" and think it means the CD matures in one-year when, in fact, it may not mature for many, many years. Only the issuing bank has the right to call a CD before maturity.

If you're very sure that a brokered CD is not callable, it can be a good investment if the term is appropriate for you. But, as Jason Flurry advises, don't buy it because there's no early-withdrawal penalty; buy it for the yield it generates.'s corrections policy-- Posted: Aug. 20, 2001
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