A certificate of deposit (CD), a type of deposit account used as an investment, usually pays more interest than a bank savings account. Although withdrawing money or closing a traditional CD before maturity typically means you must pay an early withdrawal penalty, more banks have been offering CDs that offer a grace period, with little or no penalty for early withdrawals.
Early Withdrawal Penalties
When you buy a CD, you deposit the money into an account for a fixed period of time, after which you receive the original amount and the accrued interest. Most financial services institutions charge a penalty for early withdrawal. The minimum fee that banks are allowed by law to charge is seven days of interest for withdrawal within six days of your deposit. After that period, a bank can set its own fees, which are usually higher for CDs with longer terms before maturity.
Banks charge early withdrawal penalties to discourage such withdrawals, which undermines their profits. However, there are situations in which banks cannot legally charge early withdrawal fees. If your CD is in the form of an Individual Retirement Account or IRA, and if you are older than 70-and-a-half, you can withdraw the money to meet the minimum annual withdrawal amount stipulated by the IRS. If you have significant assets in the bank, the institution won't want to lose you as a customer, so it may waive the early withdrawal penalty. It can't hurt to ask.
No-penalty CDs, also called liquid CDs or risk free CDs, offer a guaranteed interest rate combined with easy access to your funds. However, the interest rates are typically lower relative to regular CDs. Most banks give a grace period of seven days to withdraw your money from this type of CD after you deposit the money, but some banks impose a 90-day waiting period. You should ask about the grace period before you deposit any funds.
Wide Variety of No-Penalty CDs
Some banks will waive the early withdrawal penalty if you deposit the amount withdrawn into a second deposit account at the same bank. This may be to encourage you to do more business with the bank. Because banks offer a wide variety of no-penalty CDs, do your research before you hand over your money. The greater flexibility of these CDs may not be worth the lower interest they pay.
Lexa W. Lee is a New Orleans-based writer with more than 20 years of experience. She has contributed to "Central Nervous System News" and the "Journal of Naturopathic Medicine," as well as several online publications. Lee holds a Bachelor of Science in biology from Reed College, a naturopathic medical degree from the National College of Naturopathic Medicine and served as a postdoctoral researcher in immunology.