An FDIC-insured savings account is the logical place for your emergency fund. But if you’re looking for a higher interest rate on your money, consider a certificate of deposit instead. CDs typically offer higher interest rates than savings accounts, but they do tie up your money for a period of time because you’d pay a penalty for closing the CD account prior to maturity. The penalty for cashing in a CD early can eliminate any interest you would have earned, and it can even eat away at your initial deposit. Learn when you might be penalized and how you can avoid early-withdrawal penalties on CDs.
What Is an Early-Withdrawal Penalty for CDs?
In exchange for the higher interest rates CDs typically offer compared to a liquid savings accounts, banks require that you leave the money in the account for the term of the CD or pay a penalty for withdrawing your funds early, to make up for the losses the bank might face. That way, banks can count on having the money in the account for the term of the CD so they can better plan for making loans.
See: Best Jumbo CD Rates
How Much Do Early CD Withdrawal Penalties Cost?
The size of the penalty depends on the term of your CD. Typically, the longer the term, the higher the penalty. For example, State Farm charges a penalty equal to 90 days of interest for CDs with terms of 11 months or less; 180 days of interest for CDs with 12- to 23-month terms; 365 days of interest for CDs with 24- to 47-month terms; and 545 days of interest for CDs with terms of four years or more. Here are examples of early withdrawal penalties for CDs at a few major banks:
|Early Withdrawal Penalties on CDs|
|Bank||12-Month CD Penalty||24-Month CD Penalty||36-Month CD Penalty|
|Ally||60 days of interest||60 days of interest||90 days of interest|
|Bank of America||90 days of interest||180 days of interest||180 days of interest|
|Synchrony||90 days of interest||180 days of interest||180 days of interest|
|Wells Fargo||3 months interest||6 months of interest||12 months of interest|
|CIT Bank||3 months interest||6 months of interest||6 months of interest|
|Santander Bank||3 months interest||6 months of interest||6 months of interest|
|Information accurate as of Nov. 12, 2017.|
When Can Banks Waive CD Penalties?
Banking regulations allow banks to offer a CD early-withdrawal penalty waiver in limited circumstances:
- The owner of the CD dies or is declared incompetent
- The CD is held in an IRA or Keogh account and the owner attains age 59 ½ or becomes disabled
- A bank merger results in your total assets exceeding FDIC insurance limits
The bank isn’t required to waive the penalties, so meeting one of those criteria doesn’t guarantee you won’t have to pay. Consider a short-term CD or create a CD ladder if you don’t know when you’ll need to access the money.
Learn More: Your Complete Certificate of Deposit Guide
Strategies to Avoid CD Penalties
A no-penalty CD protects you against forfeiting interest in the event you withdraw your money early. These risk-free CDs pay you higher interest than the average savings account pays while giving you easy access to your funds. For example, Ally Bank offers an 11-month no-penalty certificate of deposit with rates between 1 percent and 1.5 percent, depending on the size of your deposit and no early-withdrawal penalty after the first six days. CIT Bank offers an 11-month penalty-free CD at 1.55 percent interest with a minimum deposit of $1,000 and no early-withdrawal penalty beginning on the seventh day.
As an alternative to early withdrawal, consider building a CD ladder. Laddering CDs refers to timing your CDs’ maturity dates so you have some of the CDs maturing every few months. For example, instead of investing $5,000 in one CD that will mature in three years, consider putting $1,000 in five different CDs with maturities of six months, one year, 18 months, two years, and three years.