Think twice before cashing in a CD early. The penalty may hit harder than you expect.
Now that the Federal Reserve has put interest rates into liftoff, many investors who have been stuck in low-yielding certificates of deposit may be thinking of heading for the exits early in hopes of shifting that money into CDs with better returns.
But hold on. For starters, interest rates are likely to move up gradually, and many banks will increase their deposit payouts at an even slower pace.
And then there is the early withdrawal penalty to consider.
Penalties can really sting
On short-term CDs, expect to give up 3 months of interest. With longer maturities, you'll lose 6 months to 1 year of interest. And those are just the common penalties. On some 1-year CDs, you can be charged as much as 2.5% of your total principal, or 4% of the amount you're withdrawing.
A Bankrate survey found that in nearly 90% of cases, if your total interest earnings aren’t enough to satisfy the early withdrawal penalty, the bank will confiscate some of your principal.
This is a major deterrent for taking money out of CDs early, as the whole reason investors choose CDs in the first place is to protect their principal. The prospect of losing some of that cash should give savers a reason to think twice.