Certificate of Deposit Restrictions

Understanding the restrictions on your CD helps determine if it's right for you.

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Certificates of deposit offer a secure way to invest money that you just can't afford to lose. For example, if you know that you need to buy a car in a year, but you won't need the money beforehand, a CD offers you a fixed return without the risk of market fluctuations. However, your CD may have a variety of restrictions on it.

Withdrawal Penalties

The biggest restriction on CDs is that if you take out your money early, you have to pay a penalty. When you agree to leave the money in the account, the bank counts on that promise when it makes loans, so taking your money out early causes problems. According to Bankrate.com, the typical penalty for CDs that mature in less than one year is three months' worth of interest. If the CD matures in a year or longer, it doubles to six months' worth of interest.

FDIC Insurance

FDIC insurance protects your CD in the event the bank goes belly up. However, the protection isn't unlimited. As of 2013, the FDIC only protects up to $250,000 of deposit accounts per customer at the bank. So, if you've built up quite the stash of CDs at the same bank, you might not be fully protected. If you spread your CDs across different institutions, however, you can store up to a quarter million at each bank and still be fully insured.

Interest Rates

In general, you're restricted to keeping the same interest rate for the term of the CD unless you have a specialty CD, like a bump-up CD that allows you to change the rate once during the term. So, if interest rates go up, the interest on your CD won't change. However, this isn't always a bad thing. If interest rates go down, you still get the higher rate that you locked in at the start.

Callable CDs

Some CDs have a "call" feature, which gives the issuer the option to force you to cash in your CD early. For example, a CD might mature in two years, but become callable after just six months. In that case, the bank might call your CD if interest rates fall so that it doesn't have to keep paying you the higher rates. However, the call feature only works one way -- for the bank. So, if interest rates rise and you'd prefer to get that higher rate, you're still restricted from cashing out early.