CD Penalties Are Not Created Equal

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.

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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.