A certificate of deposit, or CD, requires you to leave your principal investment with the bank for a predetermined period. This can be anywhere from a few months up to a few years. You can withdraw money early from a CD, but you normally pay a penalty for doing so.
The yield offered on a CD is based on the assumption that you withdraw principal plus interest on or after the date of maturity. However, you generally can withdraw some or all of the principal in a CD early. While you pay a penalty in either case, some banks only charge moderate fees if you maintain a minimum balance in the account after taking an early withdrawal.
Penalties and Warnings
In general, it is best to not invest in a CD if you anticipate needing the money before the yield date. The tough penalties on CDs are designed to prevent early withdrawals. Fees can vary greatly, with banks charging anywhere from a few dollars to a few hundred dollars on a $10,000 CD. Knowing the penalty rates before you invest and asking about the penalties on early withdrawals helps you avoid surprise hits after the fact. To withdraw early, go to the bank branch where you purchased the CD and let the representative know your intentions.
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