2010 CD Study
Stacks of golden coins against golden dollar
Survey: CD early withdrawal is costly

Savers who dump low-yielding CDs before maturity may pay a steep price, according to a Bankrate survey of early withdrawal penalties at 100 institutions.

Almost all of the institutions surveyed -- 92 percent -- not only levy a penalty, but also reach into principal to cover fees if necessary.

That was just one of the findings in the Bankrate survey, which looked at the top five banks and top five thrifts by deposit size from the top 10 markets nationwide. Also included in the survey were the top five credit unions, by assets, from across the country.

Typical early withdrawal penalties
Maturities less than one year90 days of interest
Maturities one year or more180 days of interest

It was the first Bankrate survey of early withdrawal penalties since 2006.

According to Bankrate's research, the typical early withdrawal penalty for a CD with a maturity of one year or less is three months' worth of interest.

For a CD with a maturity of a year or more, the typical early withdrawal penalty equals six months' worth of interest.

Some institutions wallop investors with especially heavy penalties for early withdrawals. According to Bankrate's survey, it's not always the highest-yielding CDs that sport the most punishing penalties, as the following chart shows:

Penalties on 5-year CDs
BankCityYield (%)PenaltyPenalty on $10,000 deposit
ChaseNationwide1.25$25 + 3 percent of withdrawal amount$325.00
Presidential FSBWashington, D.C. metro2.5024 months interest$506.25
Astoria FS&LANew York metro3.25360 days interest$325.00

Most institutions surveyed also reach into the principal of savers who withdraw from CDs early, but haven't yet earned enough interest to cover the penalty fees. This could result in negative returns for some savers.

For this reason, it may be a mistake for savers to purchase a longer-term CD simply to capture a higher interest rate if they plan to exit the CD early -- and pay a penalty -- when yields rise.

In a rising rate environment, savers instead should consider "favoring shorter maturities to have the flexibility of reinvesting as interest rates rise," says Greg McBride, senior financial analyst at Bankrate.com.

The Bankrate survey also found that most retirement CDs also are subject to early withdrawal penalties. More than 80 percent of the time, the penalties for retirement CDs are identical to nonretirement penalties, according to the Bankrate survey.


Plan ahead

The good news is that with just a little planning, CD investors can avoid early withdrawal penalties and still enjoy higher yields once interest rates rise.

The first step is to determine your time horizon, McBride says. It's important to determine how long you can live without the money.

To avoid the temptation of tying up money longer than you can afford simply to chase a higher yield, do the math and find out how much you would lose by cashing out early.

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