Certificate of Deposit Agreement
When account holders open a certificate of deposit at a bank or credit union, they sign a CD or time deposit agreement. The agreement acts as a contract between the issuer and the account holder. Generally, financial institutions no longer issue actual certificates for these accounts, so the customer keeps a copy of the agreement as evidence of the account. Most CD contracts cover three or four pages of legal-sized paper.
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Features
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CD agreements contain the account holder's name, dollar amount invested, interest rate and maturity date. The agreement also contains legal descriptions of the terms used in connection with the account and an explanation of the issuing entity's CD policies. Normally, CD agreements cover all features of CD products, including the types of accounts, withdrawal and deposit restrictions, and bonus features. The contract also explains the standard grace period for CDs and how the financial institution calculates interest.
Time Frame
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CDs have durations of between one day and five years; account holders can see the length of a CD listed prominently on the front page of the CD contract. Financial institutions normally allow customers a grace period of between seven and 10 days in which to withdraw funds when a CD matures. The contract must explain the length of the grace period. CD contracts don't contain information about penalties assessed by the Internal Revenue Service (IRS) for withdrawals made from CD IRAs prior to age 59 1/2.
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Types
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CD contracts explain the terms of the particular account. CDs usually pay a fixed interest rate for a specified period of time, but CDs occasionally allow account holders to increase or bump the interest rate during the CD term; financial institutions usually require account holders to make an additional deposit before bumping a rate. Rate bumps involve the customer requesting the bank to increase his existing interest rate to the currently offered rate on CDs with the same duration. Rate bumps are only possible if the going rate for CDs rises during the term of the account. If rates fall, account holders rates remain unchanged.
Prevention/Solution
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If a CD account holder dies, the surviving friends and family usually must present the bank with letters of administration to dissolve the account. To simplify things, people often add pay-on-death (POD) beneficiaries to their CD accounts. The names of beneficiaries are listed on the CD agreement, but as described on the contract, POD beneficiaries can't access funds in the account or make changes to it unless the account holder dies before it matures.
Considerations
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People shouldn't invest large amounts of money in CDs before reviewing the early-withdrawal penalties described in the CD agreement. Penalties for early withdrawals vary but often amount to six months or more of accrued interest. Banks sometimes even assess principal penalties. In certain instances, banks and credit unions offer no-risk CDs from which customers can make penalty-free withdrawals. Customers should ensure that the CD contract clearly states the no-risk provision before signing it.
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