Certificates of deposit (CDs) can be great investments for those who prefer to keep their money safe. But CDs are designed to be longer-term investments. Unlike your checking account—which allows multiple deposits and withdrawals—CDs are meant to be left alone. Cashing in or canceling a CD before it matures can cost you.
Learn more about CD penalties and how to avoid them.
- If you withdraw your money from a CD before it matures, your bank may charge you an early withdrawal penalty.
- This penalty is usually a portion of the interest you would have earned, expressed in days or months.
- To avoid the early withdrawal penalty, leave your funds in the CD until it matures, ask your bank if they'll waive the penalty, or see if you qualify for a waiver.
- Consider alternatives to CDs, such as liquid CDs, CD ladders, or other savings vehicles, if the early withdrawal penalty concerns you.
Why CDs Charge Early Withdrawal Penalties
The bank wants you to keep your money invested for a set period, which may be six months or a year, or even perhaps five years. It's willing to pay you a higher interest rate return if you do so. The bank benefits from having certainty about how long it can use your money.
Banks and credit unions typically charge penalties for early CD withdrawals. That's because they use the money you deposit into CDs to lend to other customers and buy investments that have maturities, much like CDs.
If you demand your money early, the bank might have to pay its own form of penalty elsewhere. In that case, you might have no choice but to pay a penalty to the bank if a withdrawal is your only option.
Early Withdrawal Penalty Examples
Banks typically charge a penalty that amounts to a portion of the interest you would have earned if you had held the CD to maturity. You might see it quoted as "90 days of interest" for early withdrawal. There's no maximum penalty amount, so read the fine print.
A sample penalty schedule for early withdrawal might look like this:
- 11-month CDs or shorter charge three months' interest
- 12- to 59-month CDs charge six months' interest
- 60-month CDs or longer charge 12 months' interest
|Early Withdrawal Penalties at Major Banks|
|Bank||One-year CD penalty||Five-year CD penalty|
|Ally||60 days of interest||150 days of interest|
|Bank of America||90 days of interest||365 days of interest|
|Capital One||Three months of interest||Six months of interest|
|Chase||180 days of interest||365 days of interest|
|Discover||six months of interest||18 months of interest|
|Synchrony||90 days of interest||365 days of interest|
|TD Bank||six months of interest||24 months of interest|
|Wells Fargo||six months of interest||12 months of interest|
Walking Away With Less Money
When you incur penalties on a CD withdrawal, you can lose money and walk away with less than you deposited, in addition to missing out on interest that you would have earned.
For example, suppose you have a 12-month maturity CD that you cash out in the 11th month. You'll probably walk away with more than you initially put into the CD—although not as much as it could have been had you held off for one more month.
Continuing with this same example, suppose you were to cash out after two months. You haven't yet earned the six months' interest as required by the penalty schedule. However, the bank will still take that amount by deducting it from your initial investment deposit. This action is called "invading the principal."
How To Avoid CD Early Withdrawal Penalties
If you absolutely must cash out early, look for a way to avoid penalties. First, it never hurts to ask. The staff might waive the penalty for you, particularly if it's an emergency and if you're at a friendly institution or a smaller credit union. Otherwise, all they can do is say no.
You can usually qualify for a waiver for death, disability, court-determined incompetence, and other major life events. In those types of cases, speaking directly with a representative is particularly important. Banks are permitted to offer these waivers, but that doesn't necessarily mean that they will. They're not required to do so by law.
You'll want to make a request for a waiver in person or over the phone. An automated system isn't programmed to do you any favors.
'Liquid' No-Penalty CDs
Liquid CDs are similar to standard CDs, but they work more like traditional savings accounts in that they allow you to pull money out early. Sometimes, liquid CDs have limits as to how early and how much you can withdraw, and you might have to make at least a minimum deposit, but they're worth investigating.
Your "locked in" period is relatively short with these CDs—less than a week in many cases. Still, no one would invest in traditional CDs if this option were that easy. Since you have more flexibility, you'll receive a lower interest rate in exchange for this freedom.
While it is less than a traditional CD, the liquid CD still tends to return more in interest income than the average savings account.
Alternative CD Strategies
You can try to use other flexible options to avoid penalties when you're tucking your money away in the future. CDs aren't bad options, but there might be better alternatives if you find that you keep having to pay penalties.
Laddering CDs is a strategy where you'll periodically have one of several CDs mature, often on a six-month or annual basis, giving you the opportunity to take the money penalty-free at that time.
Step-up CDs offer more flexible interest rates. Your rate will increase to keep pace when interest rates rise. This alternative can be attractive if your concern is being stuck with a paltry rate for the whole CD term. Again, these CDs pay less on average than traditional CDs.
Money Market Accounts
Money market accounts pay more than savings accounts, but generally not as much as CDs. The advantage is that you can do limited spending from a money market account using a debit card or a checkbook.
Credit cards are an expensive way to borrow, but if you need money quickly and your CD will mature soon, it might cost less to put emergency expenses on a card and pay it off as soon as the CD matures. However, a much better idea is to keep a solid emergency fund.
Frequently Asked Questions (FAQs)
How do you calculate the CD early withdrawal penalty?
The exact penalty your bank will charge you will depend on its policies. But generally, you can multiply the balance by the daily interest rate and then by the number of days of interest. So say you have a one-year $10,000 CD earning 2%, and you withdraw the entire balance early. The daily interest rate would be 0.02 divided by 365 (0.000055). If the penalty is 90 days of interest, you'd calculate it like this: $10,000 x 0.000055 x 90. The result would be $49.32.
However, that's just an illustration. Your bank may charge you interest on your withdrawal amount only or on the total balance of your account. The penalty may be calculated daily or monthly, and the interest may be simple or compound. The penalty usually depends on the length of the CD term. Contact your bank or consult your account disclosures to get the details for your particular account.
When would it make sense to accept a CD early withdrawal penalty?
It's not ideal to withdraw your CD funds early. But sometimes, it may be your best option. It could make sense to accept a CD early withdrawal penalty if it's the lowest-cost way to get cash in an emergency. For example, you might find it's cheaper to pay the penalty than it would be to put an emergency expense on a credit card that charges a high interest rate. Run the numbers to make sure.
A less-common reason you might think it's worth it to accept an early withdrawal penalty is if interest rates go up significantly after you open your account. If you've found much higher interest rates elsewhere, you'd need to be sure that the interest you'll earn will be high enough to compensate for the penalty of withdrawing from your current account.
Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?"
Chase. "Deposit Account Agreement and Privacy Notice," Page 21.
Office of the Comptroller of the Currency. "What Are the Penalties for Withdrawing Money Early From a CD?"
Bank of America. "CD & IRA FAQs."
Capital One. "360 CD Account Disclosures."
Chase. "Open a Chase Certificate of Deposit."
Discover. "Certificate of Deposit."
Synchrony. "Certificate of Deposit (CD)."
TD Bank. "Personal Deposit Account Agreement," Page 41.
Wells Fargo. "Wells Fargo CDs (Certificates of Deposit)."
Woodford State Bank. "Certificates of Deposit."
First Republic Bank. "Liquid Certificates of Deposit."