Cash News
When you make an early withdrawal from a certificate of deposit (CD), you usually lose money. The amount you lose is proportional to the length of the CD term and the amount you deposited (or the principal). So, if it’s a short-term CD with a small deposit, the penalty could be negligible.
However, that doesn’t mean an early withdrawal is always a good idea. Usually, you’ll end up forfeiting some of the interest you’ve accrued. And in some cases, you could also lose part of your initial deposit. Plus, there’s the matter of losing out on the interest you would have earned in the future.
That said, there are certain situations when it could be worth making an early CD withdrawal.
CDs are time-deposit accounts that require you to leave your money in the account for a specified period (such as 6 months or one year) in exchange for a fixed interest rate. If you break that agreement, you must pay a fee known as an early withdrawal penalty.
The specific penalty you’ll pay depends on the CD’s term, how much you have in the account, and the individual bank’s policies. Note that while there is a minimum penalty set by federal law, there is no maximum. However, many financial institutions have similar policies.
The penalty is usually calculated as a portion of the interest earned — or the interest that would have been earned — over a specified period. CDs with longer terms usually require you to forfeit more interest.
In some cases, there could be additional penalties. For example, if there was a sign-up bonus for opening the CD, you might lose the bonus too.
Read more: What should you do once your CD matures?
If you can save more money than you lose — or earn more money by moving the cash elsewhere — it’s worth making an early CD withdrawal. Here are some circumstances where you might end up benefiting:
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Financial emergency: You need money to cover a medical procedure or some other emergency, and you don’t have another way to do it without taking on debt.
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Reinvestment opportunity: You can move the money to CD or another investment that earns higher interest than your current CD, and the returns will more than compensate for your loss.
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Avoid a bank levy: You’re facing a bank levy and you want to avoid having the funds seized.
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Debt payoff: You want to pay off debt with interest charges that are higher than the returns on your CD.
Regardless of the situation, you’re more likely to lose money on an early withdrawal if you opened the CD within the past two or three months since the penalty could exceed the amount of interest you’ve earned so far.
Read more: Can you lose money in a CD? Maybe.
To calculate your early CD withdrawal penalty, start by looking up your account agreement. That’s where you’ll see the details of how your penalty is calculated. In most cases, the formula will look like this:
(Interest rate / 365) × penalty days × original deposit = penalty
Let’s say you deposited $5,000 to a CD with 4% APY, and the penalty is 60 days’ worth of interest. Here’s how you would calculate your early withdrawal penalty:
(0.04 / 365) × 60 × $5,000 = $32.88 penalty
By comparison, here’s what you would pay for an early withdrawal on a $20,000 CD with 4% APY and a 180-day interest penalty:
(0.04 / 365) × 180 × $20,000 = $394.52 penalty
In most cases, the only way to avoid early withdrawal fees is through preventative steps you take before opening a CD. However, in rare cases, you might be able to avoid fees after opening an account. Here are your options.
For emergencies, the best alternative to an early CD withdrawal is to use money from your savings.
Unfortunately, not everyone has an emergency savings fund. But moving forward, you can reduce the temptation to make an early CD withdrawal by building an emergency savings fund — and depositing it to a savings account where there’s no withdrawal penalty — before setting up a CD.
If you’re facing difficult circumstances, your bank or credit union might be willing to waive the early withdrawal penalty. For example, if you’re impacted by a major financial crisis or the owner of the CD becomes disabled or passes away, you may be able to request a fee waiver.
Another option is to choose a CD that allows early withdrawals (no-penalty CD), or choose a CD that allows you to make penalty-free withdrawals at set intervals.
The upside of going this route is you have easier access to your money. The downside? You won’t earn as much interest since these types of CDs typically pay lower rates.
A CD ladder is an investment strategy where you set up multiple CDs with staggered maturity dates. The main benefit is that you can still earn interest on your deposits, but you’ll have more frequent access to your money as the different accounts mature in case you want to use it or move it elsewhere.
There’s a chance your bank or credit union offers another option: a CD-secured loan or CD loan. With these loans, you can often borrow up to the full balance of the CD and pay it back by the CD maturity date.
With CD loans, you use the funds in your CD as collateral, meaning the money helps you qualify for the loan, and the rates might be lower than a loan with no collateral (like a personal loan). However, you can also lose your CD deposit if you miss your payments. On top of that, you’ll lose money to interest charges, since banks often set their CD loan rates roughly 2% higher than what a CD earns.