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2019 Study of CD Early Withdrawal Penalties and How They Have Changed


In 2016 we did a study on CD early withdrawal penalties (EWP). By examining EWP data from more than 1,000 institutions, we extracted average EWPs for CD terms from 6 months to 5 years. This year we looked at the data again to see how EWPs have changed. The review included EWP data from 7,562 CDs that were offered by 1,019 banks and credit unions.

As described in our 2016 overview of CD EWPs, the early withdrawal penalty is simply a penalty that is applied when a CD holder elects to withdraw money from a CD before its maturity. The EWP is intended to discourage CD holders from withdrawing money from their CD early. At the bottom of this 2016 CD EWP overview, you can see how to find EWPs for CDs listed in our rate tables at DepositAccounts.com.

The most common form of EWP consists of a certain number of days’ interest on the CD. One example is 180 days’ interest on a 3 Year CD. The penalty here is very simple: removing money from the CD before maturity costs the consumer 180 days’ interest on the principal. Not all EWPs are that simple, but the large majority are. For this study, only CDs with this simple type of EWP were included.

How CD Early Withdrawal Penalties Have Changed from 2016 to 2019

As interest rates have risen in the last few years, banks had more reason to discourage CD holders from closing their CDs early. The old long-term CDs had lower rates than new long-term CDs. Once the new rates are high enough, it becomes financially advantageous for the CD holder to close the old CD with the penalty and open the new CD with the higher rate. Raising the EWP is one way a bank can make closing CDs early less financially advantageous for the CD holder. Thus, one would expect banks to be increasing EWPs when rates are low or when they’re rising. Data that we have collected shows that is what has happened in the last three years, which has been a period of slowly rising rates.

Our study indicated that the average EWPs for all CD maturities (6 months to 5 years) increased from 2016 to 2019. The average EWPs increased the most for the 5-year CDs, rising from 242 days in 2016 to 255 days in 2019 (a gain of 5.4%). The EWP increases were generally smaller for the shorter maturities. The EWP of the 1 Year CD had the smallest increase in the last three years, rising from 119 days to 120 days (a gain of 0.8%). The following chart illustrates how EWPs have changed for the different CD maturities from 2016 to 2019.

The Best, Worst and Average CD Early Withdrawal Penalties for 2019

We pulled additional information from our EWP data as we did in 2016. First, for each CD maturity, we extracted the average, lowest (best) 5th percentile, and highest (worst) 5th percentile in order to help depositors understand what constitutes middle of the road vs. very good vs. very poor. The results are as follows:

The best and the worst EWPs changed little from 2016. The disparity between the lowest (best) and highest (worst) 5th percentile confirms the wide range of potential EWPs, once again illustrating the need for depositors to review the EWP before buying a CD. For instance, the 5 Year CD carries an EWP of 90 days on the lower end and 540 days (almost 18 months) on the higher end, a 450-day variance, while the average EWP is 255 days. A consumer who blindly buys a 5 Year CD based on APY alone, then, could be met with a relatively expensive and unwanted surprise if the need to break the CD arises before maturity. The upper end of the EWP scale on the product could cost the consumer most, if not all, of the interest earned in the time leading up to breaking it. In many cases, the EWP might even dip into the principal.

Examples of the Best and Worst CD Early Withdrawal Penalties for 2019

The following table provides a sample of EWPs for 1-year CDs from well-known institutions. The best EWP is listed on top and the worst is on the bottom. The average, lowest 5th percentile and the highest 5th percentile are also listed so you can see how these institutions compare.

Sample of Early Withdrawal Penalties for 1-Year CDs

INSTITUTIONEarly Withdrawal Penalty
HSBC (Direct CD)30 Days
Lowest 5th Percentile30 Days
Ally Bank60 Days
Capital One90 Days
United States Senate Federal Credit Union120 Days
Average120 Days
Discover Bank180 Days
Highest 5th Percentile181 Days
American Express National Bank270 Days
Popular Direct270 Days
Northern Bank Direct365 Days
The above EWPs, as well as all of those to follow, are accurate as of 03/18/19. Please refer to our CD rate tables for the latest EWPs.

The following table provides a sample of EWPs for 5-year CDs of well-known institutions in the same format as the above 1-year table.

Sample of Early Withdrawal Penalties for 5-Year CDs

INSTITUTIONEarly Withdrawal Penalty
BECU (Boeing Employees Credit Union)90 Days
Lowest 5th Percentile90 Days
Ally Bank150 Days
Capital One180 Days
Average255 Days
Goldman Sachs Bank USA270 Days
Synchrony Bank365 Days
American Express National Bank540 Days
Highest 5th Percentile540 Days
Popular Direct730 Days
The above EWPs, as well as all of those to follow, are accurate as of 03/18/19. Please refer to our CD rate tables for the latest EWPs.

Early Withdrawal Penalties: Internet Banks vs. Brick & Mortar Banks

In past studies, it has been clearly shown that internet banks on average have higher CD rates than brick & mortar banks. Also, it has been shown that they have lower fees. So it seems reasonable to expect that internet banks might have more saver-friendly EWPs. However, that was not the case for most CD maturities as the following chart illustrates:

As can be seen in the above chart, for all CD maturities except for the 6-month, the average EWPs at internet banks are higher than at brick & mortar banks for corresponding maturities. For 1-, 2- and 3-year maturities, the average EWPs at internet banks are just a bit higher. The average EWPs at internet banks are considerably higher for the 4-year and 5-year maturities. For the 4-year maturity, the difference is 82 days (31% larger). For the 5-year maturity, the difference is 70 days (24% larger).

This result is similar to what was seen in 2016. The primary difference is that the average EWPs of internet banks have increased more than the brick & mortar banks. That is especially the case for the 4-year and 5-year maturity.

The sample EWPs listed above offer examples of this trend. Three internet banks have EWPs at or above the highest 5th percentile (Popular Direct, Northern Bank Direct and American Express National Bank). One of these three banks, American Express National Bank, increased its EWPs in 2018. The EWP for the 12-month CD increased from 90 days’ interest to 270 days’, and the EWP for the 5-year CD increased from 180 days’ interest to 540 days’.

Why do internet banks have larger early withdrawal penalties?

CD holders at internet banks may be more willing to make an early withdrawal than CD holders at brick & mortar banks. Internet banks generally allow customers to manage accounts and move money at home with a computer or phone. Thus, it is easier for internet bank CD holders to make an early withdrawal and move the money to another bank where it can earn a higher interest rate. Internet banks may have seen this occur especially in the last three years, and thus, they have been quicker to increase the EWPs to discourage their customers from closing their CDs early.

10 Tips on CDs and Early Withdrawal Penalties

As you can see in the results of this study, there is a wide variation of EWPs. They can be harsh whether you’re at brick & mortar bank, an internet bank or a credit union. Thus, when you’re searching for CDs, the EWP is a critical attribute to review before deciding on a CD. As mentioned above, the bottom of this EWP overview article illustrates how you can find the EWPs in our rate tables. Since EWPs do change, it’s a good idea to always check with the institution on the current EWP. Below are ten additional tips related to CD EWPs that you should keep in mind as you look for CDs:

  1. EWP can eat into the principal of your CD. In other words, you can lose money if you close a CD early. Typically, this occurs when the CD holder makes an early withdrawal soon after the CD was opened. For example let’s assume a CD has an early withdrawal penalty of six months of interest. If you close the CD two months after you opened it, you may not only lose all two months of accrued interest, but you may also lose some of your principal equal to four months of interest. This is not always the case. Some institutions have EWPs that specify that the EWP will be the lesser of a fixed penalty (i.e. six months’ interest) and all accrued interest. That prevents the EWP from eating into the principal.
  2. EWP generally does not apply to accrued interest. If you open a CD and specify that interest to be credited back to the CD, this interest can add up to be a substantial amount, especially on long-term CDs. Many banks allow you to withdraw accrued interest before maturity without a penalty. Check the bank’s account disclosure to ensure this is the case.
  3. EWP does not apply during the CD grace period. Banks generally set up CDs to automatically renew when they mature. On the day of the maturity or during the grace period, the CD holder can choose to close the renewed CD without a penalty. Most grace periods are ten calendar days, but they can be shorter or longer. Even though there is no penalty, you may lose any interest that accrues during the grace period. Be sure to check the CD disclosure before opening the CD.
  4. When a CD automatically renews at maturity, a new EWP may take effect. It’s important to not only review the new rate for the renewed CD, but also the CD terms, including the EWP.
  5. The EWP typically does not change on a CD after it is opened and before it matures. The EWP in effect at the time it is opened should remain in effect until the CD matures. However, there have been at least two documented cases when credit unions have increased the EWP on existing CDs that had not yet matured.
  6. Some banks and credit unions have language in their CD disclosures that allows them to refuse an early withdrawal request. Although CD early withdrawal refusal by a bank or credit union is rare, it is possible. Review the CD disclosure for this type of wording.
  7. EWPs are typically waived by institutions if the CD holder dies, becomes disabled or becomes legally incapacitated. Also, it is common for an institution to waive the EWP if the CD holder has an IRA CD and is making a required minimum distribution (RMD). A few institutions will waive the EWP when the IRA CD holder reaches the age of 59 ½, but this is not common.
  8. No-penalty CDs are now available at a few internet banks. These CDs typically allow you to close a CD with a full withdrawal before maturity without any penalty. The only withdrawal restriction or penalty is during the first six days from account opening which is required by regulation. Most of these CDs have maturities around one year. The downside with these no-penalty CDs is rates that are lower than the rates of standard CDs with comparable maturities.
  9. You can evaluate the EWPs of CDs and see the effective yields when the CD is closed early by using our CD Early Withdrawal Penalty Calculator.
  10. Use our “When to Break a CD Tool” to determine the financial gain or loss of breaking a CD and reinvesting the money into a higher-rate account.
Related Pages: banking tools and data
Comments
QED
QED   |     |   Comment #1
As a possible next step, I can envision a sort of "figure of merit" (FOM) being arrived at for any CD which would relate, and take into account, the APY and the EWP. I do not have an algorithm to arrive at this FOM. But generally speaking, a higher APY would tend to elevate the FOM, while a higher EWP would mitigate in favor of FOM reduction. Said another way, if the CD you are contemplating purchasing has a high EWP, it had darn well better be compensating you with a great APY.
AnnO
AnnO   |     |   Comment #7
Needs a different name/abbreviation though, since "FOM" is already in common use around this topic as "Field of Membership". ;-)
kcfield
kcfield   |     |   Comment #2
Ken, very helpful report; and I appreciate the comparison between brick and mortar vs.internet institutions. If you get an opportunity, please break it down even further, incorporating bank vs. credit union with respect to EWP.
louis
louis   |     |   Comment #3
mysafra has some fairly decent rates but read the Account Agreements and Disclosures for Consumers on page 24.
"Early Withdrawal Penalty
A penalty may be imposed for withdrawals before
maturity. The penalty will be an amount equal to the
greater of credited
or
90 days interest."
It reads "greater" so it appears to take all the interest earned. Am I missing something?
jjj
jjj   |     |   Comment #4
One of the worst EWPs I've seen is from MidFirst Direct. CDs greater than 12 months - "Three percent of the amount withdrawn, plus a $25 fee"!!! They don't even have any products that pay over 2.75%, so you're guaranteed to loose should you need to your money in an emergency. And an additional $25 fee to slap you in the face with.
anonymous
anonymous   |     |   Comment #5
Unbelievable how many people are obsessed with EWPs.

People who cash in CDs before maturity , jumping at the ever changing current highest rate CD are the reason the banks and credit unions have such high EWPs today. Then complain about it. Could be investing in CDs aren't for you.
Robb
Robb   |     |   Comment #6
@Anonymous...If you run the numbers and the cost/benefit pays off for your time and effort and then some why not break a CD to capitalize? Ken has a very useful calculator on this site for that purpose. Seems foolish to me not to break a CD if you run the numbers and you'd be ahead by 2-3k by the end of your current maturity term. For many of us that is exactly why getting the best rates combined with lower EWP's is so attractive and why those deals go so quickly.
SolonHiker
SolonHiker   |     |   Comment #8
I tied up a bunch of funds with Fahey Bank in Ohio late last year. HUGE EWP of all the interest that would be earned over the course of the 5-year CD. But, they paid a 4% rate. So, that money is parked there in concrete for five years. It was a risk, but I guessed that rates had peaked. Time will tell.
Nothing
Nothing   |     |   Comment #9
The EWP is first merely way to discourage one from "breaking" a CD. Normally penalties (under state law) are unenforceable...unless determined to be liquidated damages...100% of the interest earned is a clear penalty and prohibited in the right situation...Your CD if negotiable has value and thus they should honor that value!
retired
retired   |     |   Comment #10
Also,the financial loss from paying an EWP can be partially offset by claiming this loss as a deduction on your Federal income taxes. The EWP is considered an adjustment to your income thereby reducing your AGI.
Brokered
Brokered   |     |   Comment #11
I broke a 10-yr local CD, paid the bank a 3% penalty (2.28% after tax deduction) and invested in brokered CD's and some stocks. If I'd gone 100% CD's my break-even period would be under two years but the stocks appreciated enough to cover the loss and then some. We have two PenFed CD's maturing in under two years and then we'll be out of local CD's and into brokered 100%.

Brokered CD's are not for everyone but I love the convenience and the ability to buy/sell without dealing with a bank. I bought a few 3.65% CD's not long ago that have appreciated 1% over par. If I needed a lot of cash in a hurry I could sell at a gain, not a loss which is what an EWP is to the customer. Of course, not all our brokered CD's are above par but the total CD amount in my brokerage is a combined 1% above par.

EWP's are the bank's hedge against fickle depositors and they make it painful for a reason. When I decided to cash-in the bank CD I was immediately offered a 20% rate bump. I declined and requested a check. Since the only relationship with this bank was CD related the bank rep (great guy) said he'd also close the required savings account. He knew we weren't returning.
Brokered
Brokered   |     |   Comment #21
CD Par value...
Suppose someone purchases a $100,000 10-yr brokered CD with survivor rights and then dies after five years. The 10-yr CD has become, due to aging, essentially a 5-yr CD. Assuming the survivors want to cash out the CD they have to make a choice between two options. First, they can simply redeem the original $100,000 (par value at maturity) OR they can sell the CD on the secondary market. Of course, one would only sell on the secondary market if the current value of the CD is above $100,000.

A few examples of secondary market value...
Gains
We have a $100,000 CD valued at $102,338
We have a $150,000 CD valued at $153,507.

Losses
We also have a $10,000 valued at $9,896
And a $50,000 valued at $47,997

If the owner in this case died the survivors should sell the "gains" on the secondary market and redeem the "losses" at par ($10,000 & $50,000).

I'm fully aware that not all CD issues are easily sold on the secondary market but I've never had a problem and was pleasantly surprised with the outcomes. To each his own but there are distinct advantages and disadvantages to brokered CD's that might be of interest to some.
Sam Kiggle
Sam Kiggle   |     |   Comment #22
Par value is a legal term. Common and preferred stocks may have a par value.

CDs have a principal amount.
Brokered
Brokered   |     |   Comment #23
#22
Principal and interest are the better terms to use for CD's.

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