CD Early Withdrawal Penalty: What You Need To Know
A certificate of deposit (CD) is a type of savings account that requires you to deposit money for a specific time. The Federal Reserve calls this kind of account a “time deposit.” Each CD matures over a certain period, called a term. A 12-month CD matures after one year, a 24-month CD after two years and so on. Banks offer different term options, from 3 months to 10 years.
A CD is one of the best ways to get high returns with minimal risk. The main downside is that when you open a CD, you commit to keeping your deposit in the account until it matures. If you withdraw early, you may face a CD early withdrawal penalty.
What Happens If You Take Money Out of a CD Early?
Like other time deposit accounts, CDs incur penalties if you close or withdraw from them before they mature. Every bank sets its own early withdrawal penalties, usually defined as a portion of the account’s interest or interest-earning potential.
How Much Is a CD Early Withdrawal Penalty?
If you withdraw within six days of making your deposit, there is a federal minimum of seven days’ simple interest. Simple interest is the amount of your original balance times your interest rate.
For example, if you put $5,000 in a CD with a 3% interest rate, seven days’ interest is $2.88.
Bank Early Withdrawal Penalties
Most banks charge early withdrawal fees far beyond this legal minimum. There’s no cap on fee amounts, so the range varies significantly. Here’s a small sampling:
|Bank||Early Withdrawal Penalties|
|Ally||– 12 months: 60 days’ interest
– 24 months: 60 days’ interest
– 36 months: 90 days’ interest
– 48 months: 120 days’ interest
– 60 months: 150 days’ interest
|American Express, Member FDIC||– 12 months: 270 days’ interest
– 24 months: 270 days’ interest
– 36 months: 270 days’ interest
– 48 months: 365 days’ interest
– 60 months: 540 days’ interest
|Bank of America, Member FDIC||– 12 months: 90 days’ interest
– 24 months: 180 days’ interest
– 36 months: 180 days’ interest
– 48 months: 180 days’ interest
– 60 months: 365 days’ interest
|Capital One Bank||– 12 months: 90 days’ interest
– 24 months: 180 days’ interest
– 36 months: 180 days’ interest
– 48 months: 180 days’ interest
– 60 months: 180 days’ interest
|First Internet Bank||– 12 months: 180 days’ interest
– 24 months: 360 days’ interest
– 36 months: 360 days’ interest
– 48 months: 360 days’ interest
– 60 months: 360 days’ interest
Calculating CD Early Withdrawal Penalties
You can calculate the amount of the early withdrawal penalty you’d have to pay with this formula:
- Withdrawal Penalty = Balance x (Interest Rate/365) x Number of Penalty Days
So if you deposit $1,000 into a CD with a 2.00% APY and an early withdrawal penalty of 60 days’ interest, your penalty would be: $1,000 x (0.02/365) x 60 = $3.29.
Weighing Early Withdrawal Fees
Consider your goals and risk tolerances when weighing the pros and cons of high early withdrawal fees. For example, suppose you have $5,000 in a 12-month CD with a 4% interest rate. Using the GOBankingRates online savings calculator, that works out to $200 in interest over the year.
If that account has a 90-day CD early withdrawal penalty, it would cost you just under $50. That’s about half your earned interest if you withdraw at six months but more than you’ve made if you withdraw at two months.
CD Early Withdrawal Penalty Transparency
Some banks are more transparent than others about early withdrawal penalties. For example, in its Deposit Account Agreement, U.S. Bank states that it will disclose early withdrawal penalty amounts when you open a time deposit account.
If you can’t get an exact figure for early withdrawal, either online or by contacting the bank, you’ll need to determine whether the benefits are worth the uncertainty.
Can Early Withdrawal Fees be Waived?
It’s possible that banks will waive the early withdrawal penalty in a few cases, such as the death of the account holder or other extenuating circumstances, but they don’t have to.
If you find yourself in circumstances that might merit the waiving of the penalty, it doesn’t hurt to ask.
Can a Bank Refuse an Early Withdrawal on a CD?
When you open a CD, you agree to keep that money in your account until it matures. Some banks, such as Lending Club, reserve the right to deny early withdrawals. You’ll need to get the bank’s explicit consent to access funds before maturity.
Also, many banks allow full but not partial early withdrawals. For example, in its FAQ documentation, American Express states that all early CD withdrawals must include the entire balance and will result in account closure.
Check a bank’s terms and conditions about early withdrawals before you open the account, or you could be unable to get to your money when you need it.
Do You Lose Principal If You Close a CD Early?
A CD’s early withdrawal fee is the same whether or not you’ve earned the specified number of months’ interest, so you can lose some of your principal if you withdraw too early. For example, if you withdraw from an account with a 90-day interest penalty after just 60 days, you’ll still owe the full 90 days’ interest.
Banks aren’t forthcoming on how they expect customers to pay that difference. Your bank may withdraw from your principal to collect the payment.
In rare cases, such as CDs with no minimum deposit, your balance may not be enough to cover the penalty. Don’t expect the bank to waive the remainder; you’ll still need to pay the complete amount.
How To Minimize Penalties on CD Withdrawals
There are a few ways to reduce the likelihood that you’ll have to pay a penalty for withdrawing funds from your CD before it matures.
- Opt for a no-penalty CD
- Choose a shorter term
- Build a CD ladder
Open a No-Penalty CD
If you haven’t chosen a CD yet and have concerns about early withdrawal penalties, consider a no-penalty CD. These CDs let you withdraw some to all of your money fee-free before the account’s maturation date.
However, no-penalty CDs often have lower rates than standard CDs. Depending on your deposit amount, you may do better opening a standard account and taking the penalty if you need to withdraw early. Research top-earning no-penalty CDs and do the math before you decide.
Choose a Shorter Term
Another option is to simply choose a shorter term. Shorter-term CDs mature faster, meaning you can withdraw your money penalty-free sooner.
According to the Wall Street Journal, many shorter-term CDs currently offer higher interest rates than their longer-term counterparts. Shorter terms usually pay lower rates, though, so you might not be able to get this win-win situation for long.
Build a CD Ladder
Though it won’t completely eliminate the risk that you’ll find yourself needing to withdraw your funds early and pay a penalty, a CD ladder can reduce that risk.
To build a CD ladder, you open a handful of CDs with varying term lengths that mature every six months to a year — for example, you could open a one-year CD, a two-year CD, a three-year-CD, a four-year CD and a five-year CD. As each CD matures, if you don’t need the funds, you can reinvest them into the longest term in your ladder.
By the time the last one matures, all of your CDs are invested in the longest term length, but you still have one mature every year. CD ladders allow you to take advantage of the — usually — higher interest rates on longer terms but keep the relative liquidity of shorter terms.
When Is a CD Early Withdrawal Penalty the Right Choice?
When you need cash and have money in a CD, you usually have two choices — withdraw and take the penalty, or leave the money in the CD and get cash elsewhere.
Consider the cost of taking the penalty versus finding another source of cash. In many cases, early withdrawal penalties will add up to less than the cost of a loan or credit card interest. Of course, that’s assuming your bank will let you take the early withdrawal.
Ultimately, the right decision will meet your immediate needs while saving you the most money long-term. The rest is up to you.
Amber Barkley contributed to the reporting for this article.
Information is accurate as of May 26, 2023, and is subject to change.
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Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.
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- The Wall Street Journal. 2023. "The CD Market Is Doing Something Strange—and It Could Have a Big Impact on Your Money."
- U.S. Federal Reserve. "Regulation D Reserve Requirements."
- Office of Financial Readiness. "Understanding Interest and How To Calculate It."
- HelpWithMyBank.gov. "What are the penalties for withdrawing money early from a certificate of deposit (CD)?"