Early Closing Penalties for CDs

After working diligently to build your savings and smartly investing your money into a lower risk, higher return certificate of deposit. Your choice to deposit in a twelve month CD was an excellent decision, but now since mortgage rates are so low and real-estate is very affordable, your money could serve you and your family better by being put toward a down payment on a home.

In the back of your mind, you know there’s an early withdrawal penalty for your CD, but you’re not sure how much that fee is going to cost you. Is closing the account prior to maturity worth it, or should you wait?

Why Early Withdrawal Penalties Exist

Financial institutions provide a higher rate of return on a CD compared to a typical savings account, making them a better long-term savings option. In fact, the longer the term of the CD, the higher the CD rate offered as an incentive to keep it on deposit since your money cannot be accessed for a while.

However, banks are aware that your financial goals may change unexpectedly. Therefore, many banks require a forfeiture of interest (generally three months’ worth) as an early closing penalty for a CD. The penalty exists to prevent you from removing your funds early, thus making them unavailable for the bank’s use.

Are There Additional Penalties for Closing Early?

Perhaps you opted for a 12 month CD upon your original investment. However, six months down the line, you suddenly need the cash in your account for an unexpected emergency expense. The bank would keep three months of your earned interest, allowing you to redeem your entire principal, plus three months of earned interest instead of six. You will never lose any of your principal balance for early withdrawal. However, some banks will not provide you with any interest at all, making the penalty much steeper.

Additionally, your taxes may be affected by the early closing of your CD. Luckily, though, the penalty from the bank may cost you money, but in no way should your credit be impacted by the decision to close your CD account early.

Please note that the early penalties for closing a CD differ from bank to bank. Federal law mandates a minimum forfeiture of seven days interest for early withdrawal on all time deposit accounts, including CDs, though it can be greater. Before making your initial investment, make sure to ask your bank their policies, including when the CD grace period is so you can withdraw money or change your investment when the account matures.