The Securities and Exchange Commission (SEC) has been receiving complaints from older investors who have unknowingly locked themselves into extra-long-term CDs of 15 to 30 years that they believed could be cashed in after one year.
The culprits are brokered CDs — sold by banks and thrifts in bulk to brokers — that often pay higher rates than CDs sold directly to consumers by banks.
Hooked by higher rates, many purchasers are misinterpreting the wording in CD advertisements. They see "callable after one year" and assume that the CD matures in a year or that they can redeem it then.
But in this case the term callable means that the bank issuing the CD can take it back after a year. (The bank will pay you the principal and interest accrued to date.) You, however, do not have this option and cannot redeem the CD without a penalty until the actual maturity date.
Some sales pitches have led investors to believe that there is no penalty if the CD is redeemed early. Not so: You may lose a portion of your investment in the CD if you ask for your money back before its maturity date.
If you own an undivided interest in a CD, you can redeem it and pay an early-withdrawal penalty based on the remaining time to maturity.
If you own a fractional interest in a pool of CDs or a jumbo CD, you probably can't redeem it, but you can sell it. If you do, however, odds are you will lose more than if you had paid an early-withdrawal fee.
If you bought a CD that doesn't mature when you thought it would, complain. If you are shopping for a CD, get the terms in writing, and take the time to understand them.
If you buy a brokered CD, make sure the issuing bank carries deposit insurance that will cover your CD. The FDIC covers deposits of up to $100,000 per depositor, per bank. If a brokered CD comes from a bank where you already have accounts, you could go over the limit.