Early Withdrawal Penalty: What You Pay for a CD, 401(k) and More

What is a CD early withdrawal penalty?

A CD early withdrawal penalty is a fee charged by a financial institution when you take money out of a CD before its maturity date. CDs are designed to hold funds for a specific term, which generally ranges from one month to several years. This is a key difference between CDs and savings accounts, which typically allow you to access funds as needs arise.

Early withdrawal penalties can chip away at your CD earnings, and possibly even your principal — which is why it’s crucial to consider these costs before deciding whether a CD is the right option for you.

How to avoid CD early withdrawal penalties

1. Use a no-penalty CD.

No-penalty CDs offer guaranteed returns like traditional CDs, but without early withdrawal penalties. Keep in mind that a no-penalty CD typically has a lower interest rate than a traditional CD, so your savings may not grow as fast. However, no-penalty CDs may still offer higher rates than regular savings accounts.

2. Make a CD ladder.

A CD ladder is another way to help you avoid early withdrawal penalties. This strategy involves opening multiple CDs with varying term lengths, such as 1-, 2- and 3-year terms. By spreading your savings across different CDs and terms, you create a flow of funds that become available at regular intervals. The CD ladder approach also allows you to take advantage of interest rate fluctuations. That means if rates go up, you’re not potentially stuck with one low-rate CD.

3. Open a savings account.

If you need more flexible access to your money, consider opening a savings account instead of a CD. Some high-yield savings accounts offer interest rates that are on par with CD rates — although, unlike CDs, the rate can change at any time.

How does a CD early withdrawal penalty work?

A CD early withdrawal penalty depends on various factors, including the policies of your bank or credit union, how long you’ve had the account, and the CD’s term. Because each bank sets its own early withdrawal penalty, make sure you compare a few different banks to get an idea of what to expect in case you need to withdraw cash sooner than planned.

Typically, banks calculate the early withdrawal penalty as a certain number of months’ interest. For example, if you open and fund a 12-month CD and withdraw the money after five months, you might pay a penalty of three months’ interest. If the amount of interest you’ve earned isn’t enough to cover the penalty, some banks will deduct the difference from your principal.

Generally, the longer the CD term, the higher the penalty.

Another factor that can affect your early withdrawal penalty is whether your bank allows partial withdrawals from a CD. While some banks allow you to take only the money you need out of a CD — and charge a penalty on that amount — other banks force you to withdraw the entire sum, resulting in a larger penalty.

Banks with CD early withdrawal penalties

Bank	Early withdrawal penalty
Alliant Credit Union	Terms of 17 months or less: Number of days the certificate is open, up to 90 days Terms of 18 to 23 months: Number of days the certificate is open, up to 120 days Terms of 24 to 48 months or 60 months: Number of days the certificate is open, up to 180 days.
Ally Bank	CDs purchased or renewed before Dec. 7, 2013: 60 days of interest CDs purchased or renewed on or after Dec. 7, 2013: Terms of 24 months or less: 60 days of interest Terms of 25 to 36 months: 90 days of interest Terms of 37 to 48 months: 120 days of interest Terms of 49 months or longer: 150 days of interest
Bank of America	Terms less than 3 months: All interest earned on the withdrawn amount or 7 days’ interest on the withdrawn amount, whichever is greater Terms of 3 to 12 months: 90 days of interest Terms of 12 to 60 months: 180 days of interest Terms of 60 months or longer: 365 days of interest
Capital One 360	Terms of 12 months or less: 3 months of interest Terms of 12 months or longer: 6 months of interest
Chase Bank	Terms of less than 6 months: 90 days of interest Terms of 6 months to less than 24 months: 180 days of interest Terms of 24 months or longer: 365 days of interest
Discover	Terms of less than 1 year: 3 months of simple interest Terms of 1 year to less than 4 years: 6 months of simple interest Terms of 4 years to less than 5 years: 9 months of simple interest Terms of 5 years to less than 7 years: 18 months of simple interest Terms of 7 years to 10 years: 24 months of simple interest
Marcus	Terms of 12 months or less: 90 days of interest on the original principal balance at the CD’s interest rate Terms of more than 12 months to 5 years: 180 days of interest on the original principal balance at the CD’s interest rate Terms of more than 5 years: 270 days of interest on the original principal balance at the CD’s interest rate
U.S. Bank	Terms of less than 1 month: Penalty is the interest on the amount withdrawn Terms of 1 month to less than 3 months: 30 days of interest Terms of 3 months to less than 13 months: 90 days of interest Terms of 13 months to less than 24 months: 180 days of interest Terms of 24 months or longer: 365 days of interest
USAA	Terms of 1 month or less: 30 days of simple interest Terms of more than 1 month to 1 year: 90 days of simple interest Terms of more than 1 year to less than 5 years: 180 days of simple interest Terms of 5 years or longer: 365 days of simple interest
Wells Fargo	Terms of less than 3 months: 1 month of interest Terms of 3 months to 365 days: 3 months of interest Terms of over 12 months to 24 months: 6 months of interest Terms longer than 24 months: 12 months of interest

How to calculate a CD early withdrawal penalty

You can use our early withdrawal penalty calculator to determine your account balance if you closed a CD before its maturity date. You’ll need the following information about your CD to calculate the effect of an early withdrawal on your investment:

Term, in months
Deposit amount
Annual percentage yield (APY)
Early withdrawal penalty, in months

If you don’t have this information, check your account agreement or contact your bank.

Should you take an early withdrawal from a CD?

Leaving your money in a CD for the entire term often makes sense to avoid an early withdrawal penalty. But breaking a CD can make sense in some situations, especially if you experience a financial setback.

Let’s say your car breaks down and you have two options: taking an early withdrawal from your CD or using a credit card to cover the repair costs. Because carrying a credit card balance can be costly — the average credit card interest rate is currently 24.61% — withdrawing money from a CD could save you money in the long run. That’s even with paying an early withdrawal penalty.

Another reason to consider an early withdrawal from a CD is if interest rates have risen significantly since you opened the CD. It might be worth paying the penalty if you could earn a much higher interest rate by closing the original CD and opening a new one.

What is a 401(k) early withdrawal penalty?

Because a 401(k) is designed to help you save for your retirement, withdrawing funds early can lead to penalties and fees. If you withdraw 401(k) money before age 59 ½, the IRS will typically charge you a 10% early withdrawal penalty on the amount taken out.

Exceptions to 401(k) early withdrawal penalties

While most 401(k) early withdrawals are subject to this penalty, there are some exceptions. You can take penalty-free 401(k) distributions to pay for expenses associated with certain life events, including:

The birth or adoption of a child (up to $5,000)
Disability or terminal illness
Natural disaster recovery (up to $22,000)
Personal or family emergency expenses (up to $1,000 a year)

If you’re unsure whether you qualify for an exception, contact a tax advisor or accountant.

How to calculate your 401(k) early withdrawal penalty

Let’s say you want to take $10,000 out of your 401(k). Because of the nature of the purchase, it doesn’t qualify for an early withdrawal penalty exception. In this case, you’ll need to pay a 10% penalty, which would be $1,000. You will also owe income taxes on the amount you withdraw.

What is an IRA early withdrawal penalty?

The 10% early withdrawal penalty also applies to individual retirement accounts (IRAs), including traditional IRAs and Roth IRAs. Exceptions include qualified education expenses, first-time homebuyer assistance (up to $10,000) and health insurance premiums while unemployed.

Should you take an early withdrawal from a 401(k) or IRA?

Like most financial decisions, the answer is: It depends. Generally, it’s best to tap your 401(k) or IRA savings only as a last resort because they are meant for your retirement.

Withdrawing money early means losing out on the power of compound interest. Plus, unless you qualify for an exception, you’ll automatically hand over 10% of any amount you withdraw from a 401(k) or IRA.

It’s a good idea to speak with a financial planner or accountant to help you decide whether taking an early withdrawal is right for your specific situation.

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.

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