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.

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.

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:

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.

How Much Do CD Taxes Cost?

Interest income is added to your other income and taxed at the ordinary income tax rates. The amount you must pay will depend on your tax 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. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!