How to Protect Yourself From CD Penalties

Prevent costly CD penalties for early withdrawals.

If you invest in a certificate of deposit, CD penalties will give you a reason to stay invested. Because a CD is a savings certificate with a fixed maturity date, if you take your money out before it matures, the bank will typically impose a CD penalty fee.

A CD penalty fee usually consists of a percentage of the total interest the CD would have earned — and it can be stiff. Don’t lose your CD earnings to penalties — learn how it might be possible to avoid a CD early withdrawal penalty. Once you find a high-interest rate CD, make it work for you — even if you do need to make a withdrawal.

How Much Will CD Penalties Cost You?

CDs offer low yields but are very safe, which makes them great investments if you’re afraid of risk. When you invest in a CD, you know what your yield will be based on the amount of your initial deposit and the CD’s maturity term, which can range from months to years.

If you absolutely have to cash in your CD early, you’ll not only forfeit the remaining interest, you’ll likely have to pay a CD early withdrawal penalty. Each bank sets its own rules for how big a penalty you’ll be charged. For example, here’s how two banks charge for early CD withdrawals:

  • Oklahoma’s Community Bank Bristow charges customers seven days of interest for early withdrawals on 31-day CDs; 31 days of interest on one-year CDs; and 182 days of interest on five-year CDs.
  • Capital One charges three months of interest for early withdrawals on CDs with 12-month terms or shorter and six months of interest on CDs with terms longer than 12 months.

Depending on how early you withdraw from your CD, the penalty might be more than the interest you earned on your account.

Read: 10 Best CD Accounts of 2017

Find a Penalty-Free CD

If you aren’t sure you can leave your money invested until the CD matures, its good to know that some banks allow you to withdraw without penalties. Lubbock National Bank, for instance, offers 18-month CDs with no penalty for early withdrawal after the first 90 days.

Your bank might allow you to make a CD withdrawal penalty-free in some cases. Here are some instances that might warrant penalty-free CD withdrawals:

  • You have a second account with the bank.
  • The money you have deposited with the bank is above a certain minimum.
  • You might have a limited range of CD term options.

Find Out: How to Close Your CD Early Without Paying a Fee

Avoid Penalties With a Brokered CD

A brokered CD is issued through a brokerage, and if you want to cash out your investment, you can resell a brokered CD — without paying a penalty — on a secondary market. Although you can’t do that with a conventional CD, it’s important to know that a brokered CD is a riskier investment because there’s no guarantee you’ll recover your money when you resell it.

Related: Find Higher CD Interest Rates Now

Other Ways to Avoid CD Penalties

You can ask your bank it would be willing to waive the CD penalty. If you’re a good customer and the penalty is small, your bank might waive it.

You can also ladder your CDs, which involves investing in a mix of short-, medium- and long-term CDs and staggering them so you have one coming due at regular intervals. If you have CDs maturing regularly, it reduces the chances you’ll need to withdraw money from one that hasn’t matured.

Another way to avoid CD penalties is to simply not take out the funds. Try setting aside a cash reserve of three months’ worth of living expenses — that way, you’ll avoid tapping into your CDs in the event of an emergency.

Next Up: Here Are the Highest CD Rates in Every State