When signing up for a certificate of deposit, don’t skip over the fine print.
The fine print of your CD agreement will outline the terms you’re signing up for, including withdrawal penalties. Once you’ve agreed to the terms of your CD, there aren’t many loopholes, especially when it comes to early withdrawal fees.
These charges can mean losing interest, which can be a killer if you incur an early withdrawal fee before any interest has accumulated. Understanding exactly what you’re signing up for - before solidifying the agreement - is imperative.
Here are five tips and tricks to avoid taking a big hit with withdrawal penalties for CDs:
1. Do your research
Not all banks are created equal. Penalties are structured differently from bank to bank: some banks may tack on additional fees or charge a percentage of the principal for early withdrawals from CDs. On the other hand, some banks may offer a grace period after signing up for a CD, when fees are not assessed.
Some institutions tout lenient terms, or even waived fees for early withdrawal. Ally Bank and Bank of America are two banks that highlight a no-fee option with their CD accounts. Knowing what your CD account’s terms and fees before closing the deal is half the battle.
2. Cash out in person
If the staff at your local banking branch is feeling friendly, they may be inclined waive your early withdrawal fee just because you’ve asked nicely -- customer service at its finest. This is especially true for smaller credit unions and institutions. Banks may be more sympathetic concerning circumstances like retirement, disability and death if you speak with your bank directly and may be willing to forgo the extra charges.
“When someone has a really good relationship with a local bank, I have seen the bank forgive early withdrawal fees,” says David F. Keefe of 4-point Financial. "This tends to happen in situations of hardship: withdrawals [are] needed for burial or health care expenses.”
3. Strategize with a CD ladder
Some savers like to practice the investment strategy of CD laddering: when a depositor distributes money into different CDs with staggered maturity dates. The benefit of a CD ladder is that your money will reach maturity at different intervals, which then can be used to reinvest or withdraw. This rotation means more frequent access to your money and also allows a depositor to reap the benefits of long-term CD rates.
Keep in mind that if you need to withdraw money before the maturity of the shortest term CD account, you may still face early withdrawal penalties based on your agreement, but having increased access to funds makes early withdrawal fees easier to avoid.
4. Weigh the risk vs. reward
What if interest rates suddenly spike -- this may soon be a reality, according to the Federal Reserve --and you are tempted to make a higher-interest rate move with your money? If you do the math on the early withdrawal fee owed versus the interest made by making the switch, sometimes you may find that your money will grow beyond the initial loss from the early withdrawal fee.
“Most CD early withdrawal penalties are either three or six month’s interest,” Keefe explains. "A low-interest rate means a low penalty. For example, if you have a $30k CD earning 1 percent, it earns $300 per year in interest. If the penalty was three months interest, it would cost you $75 to cash out. To break even, you would need a savings account earning 1.25 percent - the higher the percentage the better.”
5. Have assets in the bank
You may have more leverage over a bank than you think. If you have a substantial amount of money in an institution, as well as mixed portfolio of other low-risk credit lines, do you think a bank or credit union will come down hard on you for a few months’ worth of interest? Banks are businesses after all, and money and business from valued customers mean a lot to them. As a result, they don’t want to see you moving your money out of their institution. If you have assets in your bank, you may escape the wrath of early withdrawal fees.
Although you should aim to prevent withdrawal penalties altogether, if you do incur them, it’s important to pay them on time. Afterward, develop a different strategy for investing the next go around as fees and penalties are usually counterproductive to the goal of saving for wealth.
For more information on the best CD rates, visit the main MoneyRates CD page.
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