CD Savings Account, Understanding Penalties

When the right CD savings account is chosen, you can make a significant amount of money.  Although interest rates are currently not as high as they were a few years ago, experts believe that within the next few years things will change but even so, making money on a certificate of investment is possible.  With all the positive aspects for a CD savings account and with this being a low-risk investment, you still need to understand potential penalties involved.[br]

When the right CD savings account is chosen, you can make a significant amount of money.  Although interest rates are currently not as high as they were a few years ago, experts believe that within the next few years things will change but even so, making money on a certificate of investment is possible.  With all the positive aspects for a CD savings account and with this being a low-risk investment, you still need to understand potential penalties involved.[br]

Without doubt, investing your money in a CD savings account is a great option but there are situations whereby all of the accrued interest and some of the principal investment could be lost, not to mention the penalty charged.  Of course, for this to happen, certain things would have to take place, which are provided in this article.

For starters, a certificate of deposit is locked into the term for a reason.  The time that a bank has control of your invested money gives them the opportunity to invest or work the money so they can pay you the highest interest rate possible and so they make money.  Therefore, anytime money is withdrawn from a CD savings account before the maturity date, a penalty would ensue.  This decision for a penalty is mandated by the federal government, not the bank.

The amount of penalty incurred on a CD savings account would be at minimum seven days worth of simple interest on the amount of money taken out within the first six days after the investment money was deposited.  Now, along with this penalty stipulated by the government, most banks that offer a CD savings account will set their own rules and associated penalties.  For this reason, choosing a bank carefully when investing in a certificate of deposit is critical.[br]

To understand penalties for early withdrawal of a CD savings account consider this.  If money were taken out within the first 30 days, all of the accrued interest would be forfeited.  If the term of the CD were for two to twelve years, the penalty would be connected to three months.  Then, for CDs with a term of thirteen to thirty-six months, the penalty increases to six months.

While losing interest that you have already earned on a CD savings account is unfortunate but then losing interest that has not yet been earned can be devastating.  As an example, if you had taken out a CD for a term of eighteen months but after having the money deposited for four months, you find yourself in a situation whereby you need to withdraw some.  In this case, you would be penalized a full six months of interest even though you had only had the certificate of deposit for four months.

The level of penalty imposed by each bank varies with some being a little more lenient than others are.  This is why prior to locking your money into a CD savings account, you need to know the exact penalties that would be charged if you ever had to withdraw money early.  Now, there are times when a bank can waive a penalty but again, since banks set some of the penalties, you need to know what the exceptions are before you invest in a CD savings account.

One example in which a penalty would be dismissed would be if you were to pass away, or be declared mentally incompetent.  In addition, if you itemize on your tax returns, then often penalties for early withdrawal would be lowered.  Keep in mind that to avoid penalties on a CD savings account altogether, you could purchase the certificate of deposit through a broker instead of a bank.  Although the federal government’s penalty would still apply, you would not be at risk for penalties established by the bank.