CD Early-Withdrawal Penalty

What Is a CD Early-Withdrawal Penalty?

Investors have many options available to save their cash. Some come with high risks while others are fairly secure. Among low-risk investment options is the certificate of deposit (CD). It allows you to deposit a lump sum and earn a certain amount of interest at the same time.

There is no risk to CDs and they are insured by the Federal Deposit Insurance Corporation (FDIC). But there is a trade-off though: You must keep your money locked up for a certain amount of time to reap the benefits. Making an early withdrawal, though, could result in a loss of interest. But that's not all.

There are generally fees for taking your cash out of a CD before the maturity date This is referred to as a CD early-withdrawal penalty. But there may be ways to avoid paying this penalty. Here is how they work and what you can do to avoid them.

Key Takeaways

  • A certificate of deposit is a savings account that allows investors to deposit a lump sum and earn interest until a certain maturity date.
  • A CD early-withdrawal penalty is a fee you may have to pay if you take money out of a certificate of deposit (CD) before its term ends. 
  • CD early-withdrawal penalties can vary widely among financial institutions.
  • You should check your CD agreement for any early-withdrawal penalties, ideally before you purchase that CD, but definitely before you cash it in early. 
  • In some cases, you may be able to have an early-withdrawal penalty waived.

How CD Early-Withdrawal Penalties Work

When you buy a certificate of deposit from a bank or credit union, you make an agreement: You promise to leave your money there for a specified period of time and the financial institution agrees to pay you a certain rate of interest in exchange. That rate is typically higher than what you'd receive from a savings or checking account. But the CD is less liquid than other types of accounts.

There may come a time when you'll need access to the money in your CD. You can generally do that if you do have an urgent need. But keep in mind that this often comes with a penalty if you decide to make an early withdrawal. The amount of that early-withdrawal penalty can vary from one financial institution to another. Federal law stipulates a minimum that banks must charge for early withdrawals, which is seven days' worth of interest. But it doesn't set a maximum, so your penalty can be considerably higher.

The way that most penalties are expressed in most CD agreements is that a bank or other issuer can charge you a portion of the interest you would have earned if you'd left the money in the vehicle until the maturity date.

CDs with longer terms tend to have higher early-withdrawal penalties. For example:

  • You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less.
  • If you have a five-year CD, the penalty might be 12 months' worth of interest or more.

Be sure you should check the agreement before making an investment and definitely do so before withdrawing your money. You may find that it makes more sense to leave the CD untouched and try to come up with cash from some other source.

An early-withdrawal penalty can mean walking away from a CD with less money than you put in. If you take out a five-year CD, for example, and then withdraw your money within the first year, it's likely that the penalty will exceed the interest your CD earned over the same period.

An early-withdrawal penalty is noted on the Form 1099-INT you receive from your financial institution, showing the interest you earned for the year. The penalty is tax-deductible as an adjustment to income.

Avoiding CD Early-Withdrawal Penalties

CDs can be a safe place to put money that you're reasonably certain you won't need for a while—at least until after the CD's term ends. However, you may face an unexpected financial emergency or investment opportunity and have no other choice but to cash in your CD and suffer the consequences.

That said, there are a number of potential ways to avoid or reduce your CD early-withdrawal penalties.

Liquid Certificates of Deposit (CD)

If you haven't purchased the CD yet, consider a liquid CD or no-penalty CD. They may also be called breakable CDs. These types of CDs allow you to access your money with lower (or no) early-withdrawal penalties.

But they do come with a drawback. The downside is that they pay lower rates of interest. If you are looking for a new CD, but have a suspicion you might need the money before its term ends, these alternative CDs could be a practical option.

Ask for a Waiver

If you're already in a CD and need to withdraw your money early, ask your bank or credit union if it will waive the fees. That may seem like a crazy idea—and it might turn out to be if your CD is with a big corporate bank. But if it's with a smaller institution, where they know you, they might let you off the hook.

According to the Consumer Financial Protection Bureau (CFPB), some financial institutions will also agree in advance to waive any penalty once you have had the CD for a certain period of time.

Qualifying for a Waiver

If you are withdrawing money because of an emergency, you might qualify for a fee waiver. You can usually qualify for a waiver in cases of death, disability, or court-determined incompetence, for example. Banks are permitted to waive penalties in these situations, but they're not required to do so by law.

Look Elsewhere for Cash

You may want to consider withdrawing money from another vehicle if you can. One place you can turn to is your rainy day or emergency fund if you have one set up. Most people choose to invest money into a savings account for emergencies. These are highly liquid investment vehicles that may not incur any fees. Be sure to check with your financial institution about the rules with savings accounts, such as minimum balance requirements.

If you're considering a loan or using your credit card to access some cash, though, you'll have to weigh out the pros and cons. Make sure you do the math and ensure you don't end up spending more on interest than you would if you were to pay the early withdrawal fee for taking your money out of the CD before the maturity date.

How Much Are CD Early-Withdrawal Fees?

It depends, in part, on the financial institution that issued your CD. Most banks charge at least 90 days' interest for early withdrawals and some charge a lot more. Your CD agreement should spell out how it calculates the fee.

Can I Avoid CD Early-Withdrawal Penalties?

Banks sometimes waive CD early withdrawal penalties if you need the money for an emergency. You should phone your bank—and talk to a human—to ask about a waiver. If the bank won't budge, it might be worth looking at other ways of coming up with emergency funds.

Do All CDs Have Early-Withdrawal Penalties?

No. There are some types of CDs—liquid CDs and no-penalty CDs, for example—that have no or low withdrawal penalties. The downside is that these CDs generally pay less interest than standard CDs. Brokered CDs, which you can buy from a brokerage firm, are another option; rather than cashing in a brokered CD early, you can try to sell it to another investor on the secondary market.

The Bottom Line

If you need to take money out of a certificate of deposit (CD) before its term ends, you will often have to pay an early-withdrawal penalty. These penalties can vary widely among financial institutions and are worth checking before you commit to buying a CD. You may also be able to get the fee waived in certain situations.

Article Sources
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  1. Office of the Comptroller of the Currency. "I Cashed My Certificate of Deposit (CD) Before It Matured, and the Bank Charged Me an Early Withdrawal Penalty. Can It Do This?"

  2. Code of Federal Regulations. "Part 1030 ­– Truth in Savings (Regulation DD)."

  3. Chase. "Deposit Account Agreement and Privacy Notice," Page 21.

  4. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 18.

  5. Consumer Financial Protection Bureau. "What Is a Certificate of Deposit?"

  6. Chase. "Deposit Account Agreement and Privacy Notice," Page 21.