Certificates of deposit, also known as CDs, are a great low-risk investment option. They usually offer higher returns than savings and money market accounts while still being FDIC insured. The only downside of CDs is that you may face an early withdrawal penalty if you take your money out before the term ends. Here’s everything you need to know about CD early withdrawal fees and how to avoid them so you can make a wise investment.
How Much Are CD Early Withdrawal Fees?
When you take out a CD, you’re agreeing to keep your money in it for a certain period of time, called a term. If you need to take your money out before the term ends and the CD reaches maturity, you may be charged a penalty.
Early withdrawal penalties are typically equal to a month or more of interest, but fees can vary depending on your bank and the term of your CD. Generally, you’ll pay more to withdraw money from long-term CDs than short-term ones.
For example, Ally Bank charges 60 days worth of interest if your CD term is 24 months or less. But if you have a longer-term CD that reaches maturity in 25 to 36 months, you’ll have to forfeit 90 days of interest if you withdraw your cash early.
If your money hasn’t been in the CD long enough to accrue a significant amount of interest, you could actually end up losing some of your principal by taking it out early. So it’s best to avoid withdrawing money from your CD unless it’s an emergency.
How to Avoid Getting Hit With Fees
No one likes getting slapped with unnecessary penalties. Here are some tips to help you plan your investment strategy and avoid CD early withdrawal fees.
Go With a No-Penalty CD
If you worry that you might need access to your money before your CD reaches maturity, it may be a good idea to go with a fee-free option. Some CDs don’t have early withdrawal penalties, allowing you to access your money at any time.
Penalty-free CDs usually have lower APYs, so you won’t earn as much interest from them. But it may be worth sacrificing some gains for the added flexibility of being able to withdraw your cash whenever you want.
Don’t Invest Money You Need Access To
Many investors prefer regular CDs to no-penalty options because they offer better returns. If you go the regular CD route, it’s important to only invest money you don’t need access to.
Because CDs require you to leave your money untouched for months or even years, they aren’t a great place to keep cash you may need in the near future, such as an emergency fund. Find other places to stash money you may need on short notice, like a money market or high-yield savings account.
Build a CD Ladder
Another strategy you can use to avoid racking up early withdrawal fees is to build a CD ladder. Instead of investing all your money in one CD, you can spread your investment out into multiple certificates of deposit with different maturity dates.
The idea is to have some CDs with short terms and others with long terms so you always have access to some of your funds. This allows you to have the liquidity of no-penalty CDs while taking advantage of the higher interest of regular CDs.
Here’s an example of what a CD ladder might look like with a $4,000 investment:
- Put $1,000 in a one-year CD
- Invest $1,000 in a two-year CD
- Invest $1,000 in a three-year CD
- Deposit $1,000 in a four-year CD
When the first CD reaches maturity, you can reinvest it into a long-term CD to add another “rung” to your ladder and keep the cycle going.
You can’t withdraw your principal from a regular CD early without facing fees. However, some banks allow you to take out the interest you’ve earned at no charge. This allows you to get some cash flow and income from your CDs without accruing penalties.
CDs are a low-risk investment that can make a great addition to your portfolio. Just make sure you don’t invest money you need access to in a penalty CD, or else you may lose the interest you’ve earned to early withdrawal fees.
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