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CD early withdrawal penalties: What you should know

What we'll cover

  • What happens if you withdraw money from a CD before it matures

  • How CD withdrawal penalties are calculated

  • Whether it’s worth it to pay a CD withdrawal penalty

Have a specific goal you’re saving towards? Opening a certificate of deposit (CD) account could make sense. There's just one thing to be on the lookout for: CD early withdrawal penalties. 

While savings accounts or money market accounts might allow you to make up to six withdrawals per month, CDs don't work the same way. Knowing when you might be subject to a CD early withdrawal penalty — and what it might cost you — can help you avoid this savings pitfall. 

CD Basics

What is a CD and how does it work? In simple terms, CDs are time deposit accounts. 

You add money to a CD for a set time period. During that time frame, the bank pays interest on your deposit. Once the CD matures , you can withdraw your initial deposit, plus the interest earned or roll the entire amount into a new CD. 

CDs can have terms as short as 28 days or as long as 10 years. Banks and credit unions can offer standard CDs and specialty CDs. Standard CDs earn a fixed interest rate, and you typically can't add money to them once you open the account. 

Specialty CDs also earn a fixed interest rate, but they might have special rules that apply. For example, bump-rate CDs allow you to increase your CD rate once or twice during the maturity term. And add-on CDs allow you to continue making deposits to your CD account until maturity.

What is a CD early withdrawal penalty?

A CD withdrawal penalty is a fee you pay for taking money out of your account before the CD matures. When you open a CD, you enter into a contract with the bank. Early withdrawal penalties are the consequence of breaking that contract. 

Banks can assess CD early withdrawal penalties as a percentage of the interest earned or as a flat fee. The type of CD withdrawal penalty you're subject to should be spelled out in your deposit account agreement. 

How to calculate an early withdrawal penalty for a CD

It's up to the bank to determine how much a CD early withdrawal penalty should be. Banks that apply the penalty as a percentage typically determine the amount based on the CD term. 

For example, it's not uncommon for banks to use a CD early withdrawal structure that looks something like this. 

CD withdrawl structure
CD Term Early Withdrawl
12 months 60 days interest
36 months 90 days interest
60 months 150 days of interest

Some banks may assess even steeper penalties. For example, you might forfeit 180 days of interest for making an early withdrawal from a one-year CD and an entire year of interest for early withdrawals from a five-year CD. 

In terms of what that means in actual dollar amounts, you can plug in the numbers using a CD early withdrawal penalty calculator. Here's how the numbers add up, assuming a $5,000 deposit and a 4.25% annual percentage year (or APY)

CD Withdrawl Penalties
CD Term Early Withdrawl Penalty Penalty
12 months 60 days of interest $34.93
36 months 90 days of interest $54.40
60 months 150 days of interest $87.33

As you can see, the longer the term, the steeper the penalty ends up being.

How to avoid CD early withdrawal penalties

CD early withdrawal penalties can be a drain on your interest earnings. The good news is that you do have some options for avoiding them. 

Create a CD ladder

A CD ladder can be a simple workaround for early withdrawal charges. When you create a CD ladder, you're buying multiple CDs with different maturity terms. 

For example, you might purchase a three-month CD, a nine-month CD, a 12-month CD and a 24-month CD. The idea is that by spacing out CD terms, you always have a maturity date on the horizon. Each “rung” in your CD ladder represents a different exit point. 

Banks typically allow a 10-day grace period following maturity when you can withdraw money without a penalty. 

Open a no-penalty CD

No-penalty CDs allow you to withdraw money at any time during the maturity term without a fee. For example, with an Ally Bank No-penalty CD you can withdraw money at any time after the first six days following account opening. You get to keep all the interest earned up to that point.

Opening a no-penalty CD gives you some flexibility when it comes to how you can tap into your savings. However, it's important to note that there's often a trade-off since no-penalty CDs tend to earn a lower APY than other CDs. 

Look for flexible early withdrawal penalties

A third option for avoiding CD early withdrawal penalties is to shop around for CDs with flexible penalties. 

Banks can assess CD early withdrawal penalties as a percentage of the interest earned or as a flat fee.

For example, it's possible to find banks that allow you to make partial withdrawals from a CD. That would allow you to withdraw some of your cash while leaving the rest of your savings intact. 

You wouldn't avoid an early withdrawal penalty altogether. However, you might be able to reduce the amount of interest you hand over to the bank. 

When is it worth it to make an early withdrawal?

Pulling money out of a CD early, despite paying a penalty, might make sense if you find yourself in one of these situations: 

It's an emergency. A job loss, unexpected illness or major home repair could all prompt a need for cash. If you don't have an emergency fund to cover those types of expenses, you might turn to a CD to pay for them.

You're making a large purchase. Withdrawing money from a CD early could also make sense if you've been planning a large purchase that you're now ready to make. For example, if you're ready to buy a home you might use CD savings to fund your down payment. 

Rates are rising. Rising interest rates mean greater earnings on your savings. You might consider breaking a CD to re-deposit the funds into a new CD if the interest you could earn outweighs the penalty you might pay. 

Select the right savings vehicle

CDs can be an attractive way to save, but it's important to keep early withdrawal penalties in mind. Parking all of your savings in CDs might not be the right move if you need cash for an emergency or a large expense because early withdrawal penalties could trigger higher costs for you.

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