How to Avoid a CD Early Withdrawal Penalty

When you withdraw a certificate of deposit before the end of the term, you generally pay a penalty. Unlike other bank accounts, this tends to be the only fee a CD has, but it can be expensive. You can, however, avoid it if you plan when you will need to access funds on a CD or if you choose a CD that does not have a penalty. Learn more about how the penalty works.

CD Basics

Unlike other types of savings accounts, a certificate of deposit is a fixed term account. You agree to hold funds for a fixed term in exchange for earning a rate generally higher than other bank accounts. Banks and credit unions offer CDs with terms typically ranging from three months to five years. (Credit unions often call CDs “stock certificates,” which pay “dividends” instead of interest.) Longer-term CDs tend to have higher rates. If you break the seal on a CD before it matures, you usually pay a fee.

Cost of CD Early Withdrawal Penalty

A CD early withdrawal penalty consists of interest earned on a CD over several months, or in some cases beyond a year. The exact amount varies depending on the bank and the duration of the CD; generally, the longer the duration of the CD, the greater the penalty. Also, the sooner you withdraw money from a CD, the less interest you will earn.

Here’s how it works: Say you have a two-year CD with an early withdrawal penalty of six months interest. If you cash in the CD after seven months, you lose the interest for the first six months and you have one month of interest left. If you have that same CD with the same penalty but withdraw after only three months, you would lose money from what you originally put in the CD, called the principal.

Many banks don’t allow partial withdrawals, so when you break the seal, the whole CD ends. This comes with another early withdrawal cost: you lose the rest of the interest on the CD that you could have earned. In short, an early withdrawal means paying a penalty and losing the remaining interest. If you want to see how the two costs add up, use our CD Early Withdrawal Penalty Calculator to plug in your own scenarios.

Strategies to Avoid a CD Penalty

Before opening a CD, evaluate your options to make sure you don’t lose some of your money to a penalty.

1. Wait for your CD to mature

This is the most common way to avoid a penalty, since you are using a CD as intended. When CDs mature, you often have a window of seven to ten days, called the grace period, to opt out (learn more about CD Grace Periods). After that, many banks automatically renew a CD, so keep a close eye on your due date. Aim for shorter-term CDs if a long wait to access funds isn’t for you.

2. Open a CD without penalty

Penalty-free CDs do not charge a withdrawal before maturity. They are not as common as regular CDs and tend to last around a year. Their main downside is that rates tend to be lower than other CDs. And, like other CDs, there are no partial withdrawals. But having the peace of mind that you can withdraw at no cost almost any time is worth it. If you’re curious, check out the best CDs without penalty.

3. Go for a CD ladder

If you want the high yields of long-term CDs and the flexibility of accessing cash from short-term CDs, you can have a mix using a CD Ladder Strategy. It works like this: open multiple CDs – potentially up to five or more – with staggered durations such as one year, two years, three years, etc. When each CD matures, reinvest those funds in a new long-term CD, such as one with a five-year term. Eventually, you’ll have a long-term CD that matures every year, giving you access to emergency savings. Your CD funds also won’t be locked into a single rate of return, which is a good thing if interest rates start to climb. To learn more about CD strategies, check out our guide to how to invest in cds.

Learn more about CDs

Learn more about the process of selecting, opening and closing CDs:

Jack L. Goldstein