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Early CD withdrawal penalizes principal

 

 

Investors look to certificates of deposit as a way to preserve their hard-earned savings and earn a return by committing the money for a specific period of time. But there are penalties for early withdrawal and as Bankrate.com found in the latest survey of CD Early Withdrawal Penalties, 90 percent of institutions will confiscate some of the principal if the interest you've earned isn't enough to cover the penalty.

90% of institutions surveyed will confiscate principal if interest earnings don't cover the penalty

The most common penalties vary by the maturity of the CD. On three-month and six-month CDs, you'll typically forfeit three months' worth of interest for an early withdrawal. On one-year and two-year CDs, the most common penalty is giving up six months' worth of interest. And on a five-year CD, the most common penalty is a dead heat between forfeiting six months' worth of interest or 12 months'.

3-month CD: 3 month' interest

6-month CD: 3 months' interest

1-year CD: 6 months' interest

2-year CD: 6 months' interest

5-year CD: tie - 6 or 12 months' interest

It is important to know the specifics of the early withdrawal penalty before investing, just in case. The penalty may apply only to the funds withdrawn, or to the entire amount of the CD. This detail can make a big difference in the penalty you pay, and the policies were evenly split across the offerings surveyed.

You may ask if the steepest early withdrawal penalties are confined to the highest-yielding CDs. The answer is a resounding 'no!' In fact, on most maturities the penalties that are the most onerous are more likely to be seen on the lower-yielding offerings found in the survey. It is always important to shop around to be sure you are securing the best return for the maturity that suits your needs. That higher-yield does not necessarily come with the string of a higher-penalty attached.

For more information on CD early withdrawal penalties, and to see Bankrate.com's entire survey, just visit Bankrate.com. I'm Greg McBride.

 

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