How to invest in CDs, Money Markets & Savings AccountsCD Early Withdrawal, Penalties and Maturity OptionsBill Gerhard: Hi! I'm Bill Gerhard, Director of Financial Services for AAA. We're exploring how to invest in CDs, Money Markets and Savings Accounts. Now I'll explain the pitfalls of Early Withdrawal and Penalties and the issue of Maturity Options. Let's say you've decided to save with a CD, what do you need to know about Withdrawals, Penalties and Maturity Options? Banks are in the business of lending money; they take your deposit and then lend it back to consumers or companies usually for the same length of time as your deposit. If you decide to take an Early Withdrawal, they have to find another funding source because the loan is not matured yet.
Banks for your Penalties as an incentive for you to keep your funds on deposit until maturity. The Penalties bank access for Early Withdrawal may vary quite a bit from institution to institution. If you withdraw money from your CD before it matures you'll probably pay a Substantial penalty on the amount you withdraw. For a 5 year CD, that penalty could be from one year up to 2-and-a-half years interest or more, so think twice before you decide to make a withdrawal.
Different institutions have different rules about Withdrawing Principal and Interest, for example, if you're Withdrawing Interest, you could be limited to taking only the most recent Interest payment or you maybe allowed to withdraw all of the interest you've accrued through the end of the last month, quarter or all of the Interest that's been earned and in most cases no penalty will be imposed. Keep track of the Maturity date for your CDs, most institutions will mail a notice to you shortly before maturity but not all providers will alert you. Many will specify a grace period, if they do not receive other instructions from you, they will automatically roll the money in your matured CD into a new CD at the current market rate. An automatic rollover is a convenience but if you can find an investment at a higher market rate or you simply don't want to tie up that money, you need to take action before your money is rolled over into another CD.
I hope this has helped you understand more about Early Withdrawals, Penalties and Maturity Options for Certificates of Deposit. AAA offers you information in this video series for educational purposes only. Carefully consider objectives, risks, expenses and tax implications before investing.
Up next I'll discuss the basics on laddering CDs, a strategy that will optimize your investment. 1