CD Early-Withdrawal Penalty

A CD early-withdrawal penalty is a fee that's often charged when you take money out of a certificate of deposit (CD) before the agreed-upon end date. Here is how these penalties work and what you can do to avoid them.

Key Takeaways

  • 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 (CD) from a bank or credit union, you are making an agreement: You will leave your money there for a specified period of time and the financial institution will pay you a certain rate of interest in exchange. That rate is typically higher than you'd receive from a savings or checking account. The trade-off is that the CD is less liquid than those other types of accounts (that is, less able to be converted into cash easily at any time).

If you have to cash in your CD prematurely for some reason, you can generally do that. However, you'll usually have to pay a penalty for the 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 (seven days' worth of interest) but it doesn't set a maximum, so your penalty can be considerably higher.

Typically, a bank or other CD issuer will charge you a portion of the interest you would have earned if you'd left the money in the CD; this is the way these penalties are expressed in most CD agreements.

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' interest or more. For that reason, you should check the CD agreement before taking out a CD—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.

If you paid an early-withdrawal penalty, it will be shown on the Form 1099-INT you receive from that 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 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:

  • If you haven't purchased the CD yet, consider a liquid CD or no-penalty CD. These types of CDs allow you to access your money with lower (or no) early-withdrawal penalties. 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.
  • 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, some financial institutions will also agree in advance to waive any penalty once you have had the CD for a certain period of time.
  • 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.
  • Rather than cash in your CD, look at ways to borrow the money you need, even using a credit card. You might have to pay a relatively high interest rate (especially with credit cards), but it could still be less costly than paying an early-withdrawal penalty. You may also be able to obtain a personal loan using your CD as collateral; these are known as CD-secured loans.

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.