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When you withdraw from a certificate of deposit before the term ends, you typically pay a penalty. Unlike with other bank accounts, this tends to be the only fee that a CD has, but it can be pricey. You can avoid it, however, if you plan when you’ll need access to funds in a CD or choose a CD that doesn’t have a penalty. Here’s more about how the penalty works.
» Want to see specific banks’ penalties? Check our list of CD early withdrawal penalties by bank
Unlike other types of savings accounts, a certificate of deposit is a time-based account. You agree to lock up funds for a fixed term in exchange for earning a rate usually higher than those of other bank accounts. Banks and credit unions offer CDs with terms generally ranging from three months to five years. (Credit unions often call CDs “share certificates.”) CDs with longer terms tend to have higher rates. If you break the seal on a CD before its maturity, you usually pay a fee.
Cost of a CD early withdrawal penalty
A CD early withdrawal penalty consists of interest earned in a CD over several months, or in some cases beyond a year. The exact amount varies based on the bank and the CD term; typically the longer the CD term, the bigger the penalty is. Plus, the earlier you withdraw money from a CD, the less interest you'll earn.
Here’s how it works: Say you have a two-year CD that has an early withdrawal penalty of six months of interest. If you cash out the CD after seven months, you forfeit interest from the first six months and are left with one month of interest. If you have that same CD with the same penalty but withdraw after just three months, you would lose money from what you originally put into the CD, called the principal.
“In sum, withdrawing early means paying a penalty and losing remaining interest.”
Many banks don’t allow partial withdrawals, so when you break the seal, the whole CD ends. This leads to another cost of withdrawing early: missing out on the rest of the CD interest you could’ve earned. In sum, withdrawing early means paying a penalty and losing remaining interest. If you want to see how the two costs add up, use our CD early withdrawal calculator to plug in your own scenarios.
» Learn more about CDs in this explainer: What is a CD?
Strategies to avoid a CD penalty
Before opening a CD, assess your options to ensure you don’t lose a chunk of your money to a penalty.
1. Wait for your CD to mature
This is the most common way of avoiding a penalty, since you’re using a CD as designed. When CDs mature, you often have a seven-to-10-day window of time, called a grace period, to withdraw (learn more about CD grace periods). After that, many banks automatically renew a CD, so keep a close eye on your maturity date. Aim for shorter-term CDs if a long wait to access funds doesn’t work for you.
2. Open a no-penalty CD
No-penalty CDs don’t charge for withdrawing before maturity. They aren’t as common as regular CDs and tend to have terms close to one year. Their main downside is that rates tend to be lower than those of other CDs. And, like other CDs, there are no partial withdrawals. But having the peace of mind that you can withdraw fee-free nearly whenever can be worthwhile.
3. Opt for a CD ladder
If you want the high returns of long-term CDs and the flexibility to access cash of short-term CDs, you can have a mix using a CD ladder strategy. It works like this: Open several CDs — potentially up to five or more — with staggered term lengths such as one year, two years, three years and so on. When each CD matures, reinvest those funds into a new long-term CD, such as one with a five-year term. Eventually you'll have one long-term CD maturing every year, giving you access to some savings in case of emergencies. Your CD funds also won't be locked into just one rate of return, which is a good thing if interest rates start to climb. For more about CD strategies including ladders, view our guide to how to invest in CDs.