Saving

CD Penalties Are Not Created Equal

No one expects to withdraw funds early, but emergencies occur.

With interest rates on certificates of deposit at historically low levels, savers are scrounging to earn the best possible yield on their money. But in your quest for return, don't forget to check the fine print for banks' early-withdrawal penalties. No one expects to withdraw funds early, but emergencies occur, and you should be aware that penalty rates vary widely.

Bankrate.com recently surveyed early-withdrawal penalties at 100 institutions in the top ten markets and found that savers typically lose three months' worth of interest on a CD with a maturity of one year or less. For CDs of more than a year, a fine of six months' interest is common. And the penalty for cashing out a five-year CD can be as high as 20% to 25% of the total interest you'd earn by holding to maturity. Most banks polled will reach into your principal if the interest you've accrued is insufficient to pay the penalty.

So before you sign up, do the math to figure out how much you might lose if you were to cash in your CD before it matures. EverBank, which issues the top-yielding five-year CD, takes back 25% of the total interest you'd earn over five years, which would amount to about $67 on a $1,500 CD yielding 3.29%. Ally Bank pays a little less, but its penalty is only 60 days' interest, so you would lose less than $10 on the same $1,500 CD.

One way to skirt the problem is to create a CD ladder by purchasing five CDs of equal amounts with maturities ranging from six months to five years. One of your CDs should then be close to maturity each year if you need cash right away. If you don't, you can search for the highest-yielding CD and reinvest the proceeds.

Most Popular

2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021
Monthly Payments of the 2021 Child Tax Credit Will Begin in July
Coronavirus and Your Money

Monthly Payments of the 2021 Child Tax Credit Will Begin in July

After doubts about whether it was up to the task, the IRS says it's on schedule to start sending monthly child tax credit payments this summer.
April 13, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
April 14, 2021

Recommended

What to Make of Bitcoin
Becoming an Investor

What to Make of Bitcoin

The digital currency has delivered dizzying gains—and is just as volatile as ever.
March 26, 2021
4 Tips on How to Negotiate for Anything
savings

4 Tips on How to Negotiate for Anything

You can haggle for a better price on just about any product or service. You just need to know how to approach these conversations.
March 9, 2021
Switch Accounts for a Better Yield?
Financial Planning

Switch Accounts for a Better Yield?

If your current account has a reliable history of strong yields, it might be worth sticking around.
February 23, 2021
Is Pet Insurance Worth It?
Making Your Money Last

Is Pet Insurance Worth It?

If you’ve added a dog or cat to your family, consider pet insurance to manage routine and unexpected veterinary bills.
December 16, 2020