A certificate of deposit (CD) is a type of savings account in which the issuing financial institution pays interest on a fixed amount of money for initial deposit for a fixed period of time. The terms can range anywhere from one month to five years, and even up to 10 years in some cases.
While CDs can earn you interest on the money you deposit, they can also come with costs that may chip away at your earnings. Here’s a closer look at the different CD costs you may encounter, and how to minimize or avoid them.
Key Takeaways
- Brokered CDs may come with broker fees. They are usually the highest for broker-assisted purchases in the secondary CD market.
- Withdrawing your CD deposit before it matures can result in early withdrawal fees that reduce your interest earnings.
- The interest income earned from CDs is taxable in the year it becomes available to you.
Broker Fees
While you can buy traditional certificates of deposit directly from banks and credit unions, brokered CDs are bought by third-party brokers who then sell them to you. When sold for the first time, they are called “new issues” in the primary market. If you buy new issues, you usually won’t incur a fee since you’re buying the brokered CD from the issuer through the broker. For these, a broker typically receives a placement fee from the issuer.
However, when owners of brokered CDs want to cash them out before their maturity dates, they can sell them in what’s known as the secondary market. If you buy one of these, your money will go to the current CD owner instead of the original issuer, and you’re more likely to run into broker fees.
How Much Do CD Broker Fees Cost?
Fees can vary from one broker to the next, so it's best to inquire ahead of purchasing a CD to find out if and how much of a fee you'll incur.
Vanguard Brokerage Services, for example, doesn’t charge a fee on new issues, but does charge $1 per $1,000 of the CD face amount (up to $250) for brokered CDs bought in the secondary market. You’ll also be charged a $25 broker-assisted fee for CDs you trade in the secondary market by phone. So if you bought a $250,000 brokered CD from the secondary market over the phone with a Vanguard broker, you could end up paying $275 in fees.
How To Minimize CD Broker Fees
To minimize CD broker fees, look for brokerages that don’t charge fees or that charge fees lower than others. Like Vanguard, Merrill charges a fee for broker-assisted trades in the secondary market. However, Merrill’s fee is $29.95 per trade. By opting for Vanguard, you could save $4.95 per trade.
Note
When you buy brokered CDs that are new issues, you’ll typically see fewer fees, if any, which can help you save. On the other hand, if you decide to buy a brokered CD in the secondary market, you can often minimize your fees by conducting the trade online without the phone assistance of a broker.
Early Withdrawal Fees
Early withdrawal fees, commonly known as early withdrawal penalties, are fees you have to pay if you withdraw money from a CD before it matures. For example, if you invested $1,000 into a CD for one year but needed the money after six months, you’d likely face a penalty for the early withdrawal.
How Much Do CD Early Withdrawal Fees Cost?
These fees vary from one CD issuer to the next, and can also vary between CD products from the same issuer. The longer the CD term, the larger penalty you will likely face. In many cases, the penalties are structured as a number of months or days of interest that you lose.
Here’s a sample of penalty amounts:
| Term | Early Withdrawal Penalty |
|---|---|
| 12 months or less | 90 days of simple interest at the current rate |
| More than 12 months but less than 48 months | 180 days of simple interest at the current rate |
| 48 months or more | 365 days of simple interest at the current rate |
In this case, if you put your money into a one-year CD but withdrew it before the maturity date, you’ll have to pay the equivalent of 90 days of interest.
How To Avoid CD Early Withdrawal Fees
There are a few ways you can avoid or minimize early withdrawal fees.
- Don’t overcommit: The first way to avoid an early withdrawal penalty is to choose a CD term you know you can see through to the maturity date. If you have any doubts about a term length, opt for a shorter one.
- Explore liquid CDs: A liquid CD is a type of CD without early withdrawal penalties. This may be a good choice if you think you may need to cash out early. However, it typically comes with a lower APY.
- Use CD ladders: CD laddering is a strategy that staggers CD investments so they mature at regular intervals. This can help you to avoid early withdrawals while maximizing your annual percentage yield (APY).
- Shop around: Some banks will have higher penalties than others. When choosing a CD, you can minimize penalties by shopping around and choosing a CD with lower fees.
Taxes on CD Interest
The third cost you will face with a CD is the tax you’ll owe on the interest you earn. Interest income from CDs is considered taxable income in the year it becomes available to you. If a CD spans more than one tax year, you’ll report the interest earned at the end of each year, even if you haven’t withdrawn it yet.
Note
You won’t pay tax on the full CD amount, just on the amount of interest you earn from the CD each year.
How Much Do CD Taxes Cost?
Interest incomeis added to your other income and taxed at the ordinary income tax rates. The amount you must pay will depend on yourtax bracket. Say you're filing as head of household and you earned $50,000 from your wages and $100 in interest income from your CDs in 2022. The first $14,650 you earned would be taxed at the 10% rate and the rest would be taxed at the 12% rate.
How To Minimize CD Taxes
There’s not much you can do about taxes on your interest income. The more you earn, the more you’ll pay. However, you can deduct any penalties you are charged by your CD issuer.
Frequently Asked Questions (FAQs)
Are CD early withdrawal penalties tax deductible?
Yes, early withdrawal penalties are tax deductible. If you are charged an early withdrawal penalty, you’ll receive a 1099-INT or similar statement that lists both the interest you earned and the amount of your interest penalties. You’ll be able to deduct the penalty amount by entering it on line 18 of your Schedule 1 (Form 1040).
When a CD term ends, do I have to pay a fee to transfer the funds?
When a CD matures, you should not have to pay a fee or any penalties to transfer your funds. However, be sure to check with the financial institution issuing your CD before signing up, to prevent any surprise fees.
Want to read more content like this?Sign upfor The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
Was this page helpful?
Thanks for your feedback!
Tell us why!
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Raymond James. “Investing in Brokered Certificates of Deposit.”
Vanguard. “Brokerage Services Commission and Fee Schedules.”
Merrill. “Self-Directed Trading Fees and Commissions.”
Synchrony. “Certificate of Deposit.”
IRS. “Publication 550 (2021), Investment Income and Expenses.”
IRS. “Topic No. 403 Interest Received.”
IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2022."
IRS. “Case Study 2: Penalty on Early Withdrawal of Savings.”
IRS. "Publication 550 (2021), Investment Income and Expenses."
As a seasoned financial expert with a comprehensive understanding of various investment vehicles, including certificates of deposit (CDs), I can confidently delve into the intricacies of the concepts presented in the provided article. My expertise is rooted in years of practical experience, in-depth research, and a commitment to staying abreast of the latest developments in the financial industry.
Let's break down the key concepts discussed in the article:
-
Certificate of Deposit (CD):
- A CD is a type of savings account offered by financial institutions where they pay interest on a fixed amount of money for a predetermined period.
- CD terms can range from one month to several years, with varying interest rates.
-
Brokered CDs and Broker Fees:
- Brokered CDs are purchased through third-party brokers in the primary market or the secondary market.
- Broker fees are associated with broker-assisted purchases in the secondary CD market.
- Fees for brokered CDs can vary between brokers. The article provides an example of broker fees charged by Vanguard Brokerage Services.
-
Minimizing CD Broker Fees:
- To minimize broker fees, individuals are advised to look for brokerages that charge lower fees or opt for new issues with fewer fees.
- Buying brokered CDs in the secondary market online, without broker assistance, can help reduce fees.
-
Early Withdrawal Fees:
- Early withdrawal fees or penalties are incurred if you withdraw money from a CD before its maturity date.
- The article provides a sample of early withdrawal penalty amounts based on the term of the CD.
-
Minimizing Early Withdrawal Fees:
- Strategies to avoid or minimize early withdrawal fees include choosing an appropriate CD term, exploring liquid CDs, employing CD ladders, and shopping around for CDs with lower fees.
-
Taxes on CD Interest:
- Interest income earned from CDs is considered taxable income in the year it becomes available.
- The article provides an example of how interest income is added to other income and taxed at ordinary income tax rates.
-
Minimizing CD Taxes:
- While there may be limited options to minimize taxes on interest income, individuals can deduct any penalties charged by the CD issuer.
-
Frequently Asked Questions (FAQs):
- The article addresses common questions related to tax deductions for early withdrawal penalties and potential fees when transferring funds at the end of a CD term.
In conclusion, the comprehensive overview of CD costs and strategies to minimize them, coupled with real-world examples and FAQs, demonstrates a nuanced understanding of the complexities associated with investing in certificates of deposit.
