Useful CD Tip: Partial Early Withdrawal Without a Penalty

If you have a CD, you probably know about the early withdrawal penalty (EWP). This is the fee that you will be charged if you make a withdrawal from the CD before maturity. One thing that may not be well known is that the EWP typically only applies to a withdrawal of principal (the initial deposit). If you have established the CD so interest is added back to the CD, you may be able to withdraw that accrued interest without a penalty. This can be helpful if you need that money for some emergency. It can also be useful if you want to use that money for another CD before the rate drops.

If you think you might need the accrued interest in your CD, check with your bank or credit union to see if they will allow a penalty-free early withdrawal of the interest. Make sure to inform the CSR that your intent is to only withdraw the accrued interest and not the principal. A reader mentioned in the forum that a Capital One representative quickly and easily transferred the accrued interest of his CD into his checking account.

It's important to note that not all banks and credit unions allow you to withdraw accrued interest without a penalty before the CD matures. And if they do allow it, they may not make it an easy process. So you should first check on this in the account disclosure before opening a CD. Also, banks may require you to decide before the CD is opened about how interest will be paid (let it accrue or receive the interest by check). Once the CD is opened, they may not allow a change.

Below are 3 internet banks and the options they provide for withdrawing interest:

CIT Bank

How do I receive interest?
You can allow the interest earned to remain in your account and take advantage of compounding. Otherwise, posted interest on your CIT Bank CD can be withdrawn from your account at any time by contacting our Customer Service Center at 855-GO-BANKCIT (855-462-2652). For convenient and quick access to your interest payments, we can electronically transfer the funds to the linked checking or savings account of your other bank. Or, if you prefer, we can issue and mail an official check.

Discover Bank

I can't find a similar FAQ at the Discover Bank website. However, I was able to find the following information regarding CD withdrawals from a hard copy of a Discover Bank account agreement that I received last year. Make sure to review the latest disclosure from Discover Bank before opening a CD.

You can withdraw interest that has been posted to your Account anytime during the term of your CD by:

* Registering via the Account Center to have interest automatically transferred to your Discover Money Market or Online Savings Account.
* Registering via the Account Center to have interest automatically transferred to a bank account that you designate.
* Requesting an Official Bank Check sent to you in the amount of interest posted to your CD.

If you withdraw all or part of the Issue Amount (the amount of your initial deposit or the amount of your renewed deposit in the case of a renewed CD) from your Discover CD Account prior to the day of maturity, we may charge your Account an early withdrawal fee.

Ally Bank

As I mentioned above, not all banks allow CD holders to withdraw accrued interest from a CD before maturity. Ally Bank is one of them. In Ally's account agreement, it states that "you may not make a partial withdrawal of funds you deposit in a CD prior to the maturity date". You can designate that interest be disbursed monthly, quarterly, semi-annually or annually. This can be done when the CD is opened or during the CD term. However, once interest is added to the CD, it can't be withdrawn. Here's what I was told by an Ally CSR in a chat session:

When you open the CD online or by phone the CD is automatically defaulted to have the interest remain on deposit and post at maturity. You may contact us at anytime during the term to set up interest disbursements and we can send you the interest up to the point of contacting us and going forward until the CD matures. You will not receive a penalty if you choose to have the interest disbursed.

Final Notes

One thing to remember if you decide to withdraw accrued interest from your CD is that this will slightly lower the APY. The APY is typically higher than the interest rate since APY factors in the compounding of the accrued interest. If interest isn't added back into the CD, the APY will be the same as the interest rate. In today's low interest rates, you won't see much difference between the APY and the interest rate.

Another important thing to remember is that once a CD is renewed, all of the interest that had accrued before renewal is considered part of the principal of the renewed CD.