Withdrawing CD Money before Maturity can be Expensive

Certificate of Deposits (CDs) as we all know are bank accounts in which the customer deposits a minimum balance for a fixed period. These accounts offer higher interest rates than savings accounts but have a hefty penalty if you withdraw your money before maturity period of the deposit.

So if you want to take the benefit of rising investment markets by withdrawing your money deposited in CDs and putting them in higher return investments, then you should consider the early exit penalties. You must take into account the cost of early withdrawal of your money and check that this cost is not more than the benefit you will get by committing your money to another account or investment option.

Usually, for CDs of less than one year, you will lose three months interest and for CDs of greater fixed period, around six months of interest or more. A number of institutions even charge a fixed penalty and a part of the withdrawal amount. In case of a fixed penalty fee, if the interest cannot cover the amount, then some principal can also be retained, which would prove to be a big loss for the investor.

So if you think that interest rates or returns of other investment options are bound to rise, then you should build a CD ladder instead of buying a long-term CD. In a CD ladder, you buy CDs of different maturity periods like two months, three months and so on. After every month or so, one of your CDs will mature and you can invest this money in an instrument that will give higher returns. A CD ladder will also ensure that you get your money back periodically and you will not have to break one of your CDs if you need money. It helps you balance liquidity with good returns.

When you are investing in CDs, you should carefully think about the time for which you can easily tie that money down. Do not get tempted by higher interest rates. Another option is to choose liquid CDs that give lower interest rates, but allow early withdrawal without penalty after some time (usually after seven days). These CDs are not common and do not have standardized terms. So you should carefully review the terms of a liquid CD and compare it to a short-term traditional CD before you invest in one.

If liquidity is very high on your priority, then it is better to invest in money markets or similar investment options, instead of risking early withdrawal penalty with CDs.

Comments

  1. http://arjun says

    if by mistake money was deposited in the loan a/c how it was withdraw. what was the procedure

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