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Managing Money : Taking the Pain Out of Early CD Withdrawal

September 10, 1988|BILL SING

One of the biggest pains of bank certificates of deposit is their early withdrawal penalties. You know the feeling: You want money in your CD, maybe because of a medical emergency or simply a desire to spend it or invest it elsewhere. But you know that if you take it out, you will lose some of your hard-earned interest.

"If you open a CD, you really should avoid the early withdrawal penalty; it does hurt you," says Alan F. Meyer, chief executive of Meyer Weekly Interest Rate Survey, a Woodland Hills newsletter.

But with a little searching or ingenuity, you can minimize the early withdrawal problem. Thanks to deregulation, withdrawal penalties now vary widely, so you can shop for a bank or savings and loan with a more lenient policy. Some institutions will even waive the penalties in certain cases or penalize you only for the portion of your deposit that you need to withdraw. Alternatively, you can divide your deposit.

Remember, however, that your main objective in a CD should be to earn a high rate of interest, with the safety of federal deposit insurance. Don't buy a CD just for a low early-withdrawal penalty, only to earn far less in interest.

Here are some tips on minimizing a penalty:

- Divide your deposit into smaller segments. Instead of placing $10,000 into one CD, try dividing it into four $2,500 segments and opening four separate CDs. That way if you need only part of your money, you won't incur penalties for the whole amount.

"The advantage of this is that it allows you to go for a longer term and higher rate," says Martin G. Bradshaw, president of Rate%Gram, a La Costa newsletter that tracks CD rates.

Be aware, however, that this tactic may involve a bit more paper work. Also, some institutions pay higher interest for larger deposits--but won't add up separate smaller accounts into one larger total. And most require minimum deposits of at least $500 to $1,000 to open CDs.

Another alternative: Divide your deposits according to maturities. Put some in money market funds, money market deposit accounts or short-term CDs and the rest in longer-term accounts. Some institutions are even offering tiered CDs that will, in effect, do this for you. Part of your funds mature early and the rest later.

- Find institutions with more lenient penalty policies that still pay competitive rates. Since withdrawal penalties were completely deregulated in 1985, many institutions have shortened penalties considerably. While some still charge as much as six months' interest on CDs with maturities longer than one year and as much as three months' interest on CDs of less than one year, others charge considerably less.

To find out an institution's policy, ask for its disclosure statement discussing its policy on CDs. Every S&L or bank must provide such a statement, Meyer says.

- Find institutions that will waive penalties for emergency withdrawals. Most institutions will waive them for customers who can demonstrate major financial emergencies, such as major medical bills or a death in the family, Meyer says. This often is done on a discretionary basis, with greater leeway often given to senior citizens or longtime customers.

- Shop for low- or no-penalty CDs. These are rare, but some exist, says Gail Liberman, editor of Bank Rate Monitor, a North Palm Beach, Fla., newsletter. For example, Central Fidelity Bank in Richmond, Va., is among at least two Virginia banks that have waived penalties entirely, she says. Dreyfus Corp.'s consumer bank in New Jersey has been waiving penalties as long as you reinvest your money in one of the firm's mutual funds, excluding its money market fund, Liberman notes. Loyola Federal Savings in Baltimore has just launched a three-year CD that allows you to withdraw once each year during a one-week period on the anniversary date, she says.

Some institutions waive penalties in exchange for a lower rate, perhaps between a quarter and a half percentage point less. Imperial Savings Assn. of San Diego, for example, offers an 18-month CD with a $1,000 minimum deposit under which you can withdraw all or part of your balance at nine months without incurring a penalty, says Charlotte Wingfield, a senior vice president for retail deposit acquisition. The rate, however, will be cut from the 18-month rate, currently 8%, to the nine-month rate at the time you opened the account, now 7.7%. You also must keep at least $1,000 in the account to keep it open.

Alternatively, some institutions pay you an an interest bonus if you hold the CD all the way to maturity.

- Find institutions that will allow partial withdrawals. Some banks and S&Ls, like Imperial Savings, will allow you to withdraw part of your CD, with a penalty applying only to that portion you withdraw, Meyer says.

If you do pay an early withdrawal penalty, however, there is one consolation: The penalty is tax-deductible.

Bill Sing welcomes readers' comments but regrets that he cannot respond individually to most letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.

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