Certificates of Deposits, more commonly referred to as CDs, are what is known as a time deposit. They are provided by banks and credit unions and function much like a savings account because they are FDIC insured and practically free of risks.
CD terms can be set for 3 months, 6 months, 12 months, up to 5 years or even longer. CDs redeemed before their maturity date are subject to penalties or forfeiture of a portion of the interest that has been earned.
Withdrawing funds from a CD that has not yet reached maturity generally results in substantial penalties, usually the loss of several months of accrued interest earnings. These penalties exist to discourage holders from closing the account prematurely.
Most banks set rates competitively in order gain business, as interest rates rise or drop, banking CD rates tend to follow suit. Often credit unions will offer slightly higher rates as well due to being categorized as a nonprofit they have a slight flexibility in being able to offer better interest gains.
Withdrawal of the principal can also require that the entire CD be closed. Once the CD has reached maturity financial institutions may offer to automatically rollover the funds in to a new CD.
Some investors use ladder strategies to diminish these losses by allocating the deposits over several different terms so that at least a portion matures periodically to then be reinvested.
If you require the money in a CD before the maturation date arrives then you are very likely to be imposed a penalty that will cause you to lose some of your hard earned money if you decide to withdraw money from it. The penalties or charges imposed by issuing banks vary from one to another.
Typically a bank will notify the investor when a CD is poised to reach maturity in order to request instructions on its distribution and often to extend the invitation to rollover the funds (principal and accrued interest) in to another CD for a separate term. When no directions are provided, it is customary for the bank to automatically rollover the expired CD, allowing only a window during which the investor can redeem the CD without incurring a penalty.
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