A certificate of deposit, or CD, usually pays higher interest than a regular savings account in a bank or credit union. In return, you must lock up your money for a specific time period, such as one or two years. Your deposit agreement explains the terms and conditions of your CD, which vary with the particular account and institution. In most cases, you must pay a penalty to cash a CD before maturity.
A federal law requires a minimum of seven days interest for early withdrawals from time deposits, according to Bankrate.com. However, there is no legal maximum, and each institution sets its own terms. A 2010 Bankrate.com survey found that a typical penalty is 90 days interest for CDs under one year and six months' interest on longer terms. If your CD hasn't accrued enough interest to pay the penalty, most banks take it out of the principal.
Many savings institutions waive early withdrawal penalties if the account holder dies, although they are not legally required to do so, according to the FDIC. Banks also often allow early withdrawals when the account holder is declared mentally incompetent or for retirement CDs. In the case of retirement CDs, account holders must normally be 59 1/2 or older to make penalty-free withdrawals.
Some banks and credit unions offer special liquid CDs, which allow penalty-free withdrawals. Usually you have to wait seven days after opening the account to take out funds. These accounts are not always available and their terms vary. Money market accounts may be a better choice because liquid CDs usually pay lower interest than regular CDs.
Instead of buying CDs directly from a savings institution, you can also buy them through a broker. Brokered CDs vary, but some brokerages advertise that you can take your money out without paying a penalty. However, withdrawing your money requires selling the CD on the secondary market. If interest rates have increased, you'll have to sell at a discount. This means that market uncertainties can cause you to lose some of your principal. Although not technically a penalty, your loss can be higher than a bank penalty.
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