Banks have the right, by law, to charge you penalties for withdrawing part or all of a certificate of deposit prior to its maturity date. Legally, the only conditions that prohibit banks from charging early withdrawal penalties are your death -- not a pleasant option -- or if you've reached 70 1/2 years old and your CD represents your traditional IRA account, since IRS rules mandate that you must withdraw funds beginning at that age.
More banks and credit unions offer "no penalty" CDs, which operate like all other certificates of deposit, but allow you to withdraw your money early without facing penalties. However, in most cases, the interest rate you'll receive is less than classic CDs because of this feature. If you're unsure of your ability to keep your CD to maturity, this option may be a good choice to avoid early withdrawal penalties.
Ask for Waivers
Another option to avoid penalties is to ask your bank or credit union to set a condition that waives early withdrawal penalties. You'll probably have a better chance of getting a "yes" from your favorite credit union, because they have no stockholders, only members, and are more sensitive to member requests since their members are the owners of the financial institution. However, you can still ask for a waiver of early withdrawal penalties from your favorite bank. You may receive a resounding "no," but there is no harm in asking.
Many investors concerned about early withdrawal penalties purchase brokered CDs. These are bank CDs sold by a licensed brokerage firm. In most cases, they come with no early withdrawal penalties. You can also sell these CDs just as you could with any investment; however, you may receive a price that's less than the projected value at maturity since you've already earned some interest.
Early Withdrawal Penalties
Creating conditions for avoiding early withdrawal penalties for CDs is a worthwhile task. Banks can charge penalties up to seven days' interest if you withdraw funds within six days of getting your CD. After that period, banks can set their own individual penalties. Typically, CDs with one year maturities or less, come with penalties of up to three months' interest. Those CDs with up to five year maturities can cost you up to six months' interest. CDs with five year maturities may cost you up to nine months' interest. None of these options are cost-effective.
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