CD Early Withdrawal Penalty: Should You Pay It?
Certificates of deposit (CDs) involve locking up your funds for a set term, such as one year or three years, in exchange for a guaranteed interest rate. If you need to access your money sooner, you’ll usually be charged an early withdrawal penalty, which can reduce your earnings and sometimes even your principal. Below, we’ll cover how to determine whether an early CD withdrawal is the right option for you.
Should you take an early withdrawal from a CD?
Withdrawing money from a CD before it reaches maturity is generally not recommended because of early withdrawal penalties. However, depending on your situation, it could still be the best option. Here are a few scenarios where it could make sense:
- Interest rates are much higher than when you first opened the CD. If rates have gone up significantly since you opened the CD, it might be worth withdrawing early to reinvest the money into a new, higher-yield CD. Just be sure the extra earnings outweigh the penalty you’ll pay for early withdrawal. Try our early withdrawal penalty calculator to see whether it makes sense to pay this fee.
- You’re facing a financial emergency. If unexpected costs arise, such as medical bills or expenses related to a job loss, you may have no choice but to dip into your CD. However, if you have funds in a traditional savings account, it’s wise to withdraw money from those accounts first because you won’t be charged early withdrawal penalties.
- You want to pay off high-interest debts. Carrying high-interest debts, such as credit card balances, can cost you more over time than the penalty for early withdrawal. In this case, using CD funds to repay your debts can make financial sense. Still, explore other debt repayment options first.
How CD early withdrawal penalties work
A CD early withdrawal penalty is typically calculated as a set number of months’ worth of interest. The exact amount you’ll pay as a penalty depends on a few factors, including the CD term, annual percentage yield (APY), and your bank or credit union’s policies. Generally, the longer the term, the bigger the penalty.
Keep in mind that if your CD came with a sign-up bonus or promotional cash incentive, you may also lose the bonus as part of the early withdrawal penalty.
CD early withdrawal penalties at major banks
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Marcus by Goldman Sachs |
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Can I withdraw the interest on a CD before maturity?
Yes, some financial institutions allow you to withdraw your interest earnings before the CD’s maturity date, which can help you cover unexpected expenses without risking your principal or incurring extra fees. You can generally opt to have the interest sent to a linked bank account or have a check mailed to you, though this will depend on your financial institution.
How to avoid CD early withdrawal penalties
Build an emergency fund
One of the best ways to avoid dipping into a CD early and paying an early withdrawal penalty is to keep some cash in an emergency fund. When deciding where to open an emergency savings account, it’s best to choose an account that’s highly liquid, such as a high-yield savings account or money market account. Having easy-to-access savings can also help you avoid taking out high-interest debt, such as using credit cards, to pay for unexpected expenses.
Open a no-penalty CD
A no-penalty CD is what it sounds like: a CD that allows you to withdraw funds at any time without an early withdrawal penalty. The trade-off is that no-penalty CDs usually offer lower interest rates compared with traditional CDs. Still, they can be a solid option if you want some growth without losing access to your money for a set time.
Create a CD ladder
A CD ladder involves opening multiple CD accounts with varying maturities, so you have access to lump sums of cash on a consistent basis. Instead of depositing $10,000 into one 3-year CD, for example, you could deposit $2,500 into a 6-month CD, a 1-year CD, a 2-year CD and a 3-year CD, respectively. As each CD matures, you can reinvest the money into new CDs or use the funds for everyday expenses.