Certificates of deposits are one of the safest investments you can make. Plus, banks and credit unions pay some of the highest savings rates on CDs because you’re agreeing to lock up your money for a designated amount of time. The key word is “lock” -- if you need to access your cash before your term ends, you’ll likely wind up paying an early withdrawal fee.
When comparing CD rates, don’t overlook the penalties for early withdrawal. Otherwise, you may be on the hook for interest or fees that dip into your initial deposit. Read on to make sure you know how much early withdrawal penalties cost, when the fee is worth it and how to avoid them altogether.
How do CD early withdrawal penalties work?
When a bank agrees to pay you an annual percentage yield, or APY, on a CD, it’s with the understanding that you’ll keep the money in the account until the maturity date, when the CD term ends. Banks usually offer higher rates on CDs than on savings accounts, because they’re assured the money will be available for them to loan out to borrowers for a set amount of time.
If you, the account holder, need your cash before the CD term ends, the bank will charge you an early withdrawal penalty. You might even have to take out the full amount of your initial deposit since many banks won’t allow partial withdrawals.
How much are CD early withdrawal penalties?
The cost of an early withdrawal penalty depends on two key factors: your bank and your CD term length. The vast majority of early withdrawal penalties are a percentage of the interest earnings. Generally, with a longer CD term, you’ll face a stiffer early withdrawal penalty, losing a bigger chunk of interest.
Consider these early withdrawal penalties for high-yield CDs with various terms at Marcus by Goldman Sachs:
- Less than one year: 90 days of interest
- One year to five years: 180 days of interest on the original principal balance
- Over five years: 270 days of interest on the original balance
Let’s say you open a two-year CD with Marcus by Goldman Sachs with a 4.35% APY, and deposit $1,000 and decide to withdraw the money at the one-year mark. You’ll pay a penalty of $21.29, while forfeiting $45.39 in future interest.
When should you withdraw early from a CD?
No one wants to pay a penalty to access their cash, but sometimes withdrawing from your CD early is a necessary move. Here are some instances when an early withdrawal might be worth it:
If there’s an emergency: Let’s say you need $10,000 to cover a major medical expense, and you’ve locked up a big chunk of your savings in a CD. If the only other option is paying for that operation with a credit card, you’re better off forfeiting some interest. Sure, you’ll be handing the bank some of your earnings, but that’s much better than racking up debt on a card with a 20% APR. (As a general reminder, never lock all your savings up in a CD.)
If rates rise dramatically: Let’s say you locked up $10,000 in a three-year CD last year. At the time, you scored a 3% APY. Now, you’re seeing the same CD with a 4.8% APY. Should you wait another two years while earning that 3% APY, or pay the early withdrawal penalty and reinvest at the higher rate? The answer isn’t clear-cut. First, check the bank’s early withdrawal penalty to make sure it’s worth it. If the penalty is significantly less than how much you’ll earn with the new CD, pay the fee. If not, wait until the CD matures.
How to avoid early withdrawal penalties
Though early withdrawal penalties are common for most CDs, there are ways to get around them and avoid having to pay them.
Ask for a waiver
It never hurts to ask your bank for an exception. The worst you’ll get is a “no.” And if you qualify as a loyal customer -- with money across other savings and investment accounts -- the bank may be more willing to listen to your circumstances and waive the fee. If you lost your job or have a family member in the hospital, it’s worth speaking with a customer service representative to explain why you need to withdraw from the CD and ask about options for waiving or reducing the penalty.
Open a no-penalty CD
If you don’t want to pay early withdrawal penalties at all, you should consider no-penalty CDs instead. These accounts have no restrictions on accessing your money early (besides an initial waiting period of around a week). While you’ll earn a lower APY than you will with a traditional CD, some online banks are offering fairly competitive no-penalty CD rates. These aren’t as widely available, though, so your options will be limited.
Opt for a CD ladder
If you’re concerned about watching rates rise after locking up a massive chunk of money in one CD, consider building a CD ladder. Rather than putting all your money in one long-term CD, you can diversify your funds across multiple maturity dates. This way, you won’t feel as tempted to pay an early withdrawal penalty -- you can wait until one rung of the ladder is up to withdraw those funds or reinvest them elsewhere. For example, instead of parking all your money in a three-year CD, you might open six-month, nine-month, one-year and three-year CDs.
Wait for the CD to mature
The easiest way to avoid an early withdrawal penalty is to hold off until the maturity date. Playing the waiting game, though, depends on how badly you need the money and how much time is left until the CD term ends. If your car breaks down and you require a new set of wheels to get to work, you might need the money immediately. However, if you’re simply looking to move money into a different investing option, try to stick it out to avoid leaving any interest with the bank.
Can a bank deny an early withdrawal?
Yes. Depending on your CD agreement and the bank, you might not actually be able to take the money out. Consider this disclaimer from U.S. Bank’s CD terms (PDF): “This certificate is an agreement to keep funds on deposit with the bank until the current maturity. Except as required by law, withdrawal prior to maturity will be permitted only with the consent of the bank which may only be given at the time of withdrawal.”
It’s important to point out, however, that instances of banks turning down early withdrawal requests are not common.
FAQs
If it’s a traditional or high-yield CD, you’re probably going to lose some -- or all -- of the interest you’ve earned. Before withdrawing money before the CD term ends, read the fine print of your CD agreement to see what the bank typically charges for early withdrawals. If the CD term is less than one year, you may lose 90 days of interest. If the term is longer, the penalty will be steeper.
While there isn’t much to celebrate about paying an early withdrawal penalty, there is one potential good piece of news: You can deduct the amount on your taxes, according to the IRS. This is in Box 3 of Form 1099-INT, but it’s best to ask a tax professional for assistance.