02 Aug Understanding penalties for Certificates of Deposit

Q. They say when I make my annual Required Minimum Distribution (RMD) withdrawal from the CD, that if I withdraw more than the RMD I would have to pay the bank a bank penalty. That doesn’t seem right.
— Confused

A. Certificates of Deposit (CDs) have rules set by the individual bank that issues them.

It sounds like you’re would be incurring a penalty for early withdrawal from the CD, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“Nearly all banks will levy a penalty, but if necessary they will dip into your principal to cover the fees if you have not earned enough interest yet,” she said. “This penalty is typically a certain amount of interest based on the term of the CD.”

She recommends you go talk to your bank and ask for the bank’s policy on excess withdrawals, and how the penalty is calculated.

D’Agostini said many banks have a minimum penalty amount, and there are several ways they may calculate it. It could be based on only on the money withdrawn on a monthly basis, or it could be calculated as a penalty on the entire balance, or it could be calculated on a daily interest rather than monthly basis.

CDs are issued for a set amount of money for a fixed amount of time. The term lengths typically range from six months to five years, and the longer terms generally give more favorable rates, D’Agostini said.

“CDs generally pay more interest than you would receive in a savings or money market account and when shopping for CDs, you should consider a financial institution that is paying higher rates with better terms,” she said. “You should also assess your financial needs for the period of time until the CD matures, so that you don’t commit more to the investment than your RMD would allow.”

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