Certificate of deposit accounts can be useful when saving for short- or long-term goals. They lock in your money for a certain period and guarantee an interest rate. But sometimes, life happens in the middle of the CD’s term. You have a medical emergency, your car conks out, or (much better!) a friend offers you a once-in-a-lifetime opportunity to join a trip to Paris but you just don’t have cash on hand to cover the expense. In these and other “I need money now” situations, you may be tempted to crack into a CD.
Doing so, however, means you’ll have to pay an early withdrawal penalty. You’re breaking your promise to stick with your maturity term (the amount of time the CD was set for). This could cause you to forfeit some or all of the interest earned. Let’s take a closer look at just how much financial damage early CD withdrawal can cause. And we’ll also highlight ways to avoid triggering a CD withdrawal penalty.
Understanding Certificates of Deposit
What is a CD? In simple terms, it’s an FDIC-insured time deposit. When you open a certificate of deposit account, you’re depositing money for a specific time frame. Depending on the CD, this may be as little as 30 days or as long as 10 years.
As the CD matures, your balance can earn interest. The annual percentage yield or APY earned on a CD can depend on the maturity term. Generally, the longer the term, the higher the interest rate and APY. CDs may not earn the same amount of interest as a savings account, with APYs that may be higher or lower, depending on the CD account terms. However, the rate is typically higher than a standard savings account.
Once the CD matures, you can withdraw your original deposit and the interest earned or roll the entire balance over into a new CD. But if you take money out before the maturity date, the bank can charge a CD withdrawal penalty.
Recommended: How to Start Investing in CDs
What Are CD Early Withdrawal Penalties?
When you open a CD account, it’s with the understanding that you won’t withdraw your original deposit until the CD matures. If you take money out before the maturity date, banks can assess a CD early withdrawal penalty. Federal law sets the minimum penalty for early CD withdrawal at seven days’ interest if you withdraw money within the first six days after deposit. Banks can set the maximum CD withdrawal penalty higher.
The amount you might pay for withdrawing money from a CD early can depend on several factors, including:
• Maturity term of the CD
• How long the CD was open before you made the withdrawal
• The amount of the initial deposit and the amount that’s withdrawn
Your bank may or may not allow you to make a partial early CD withdrawal. If you’re not able to withdraw a partial amount, you might have to cash out the whole CD which could result in a larger penalty.
Calculating CD Early Withdrawal Penalties
You’re probably wondering just how steep a penalty you’d have to pay for early CD withdrawal. Are we talking $5 or 5% of the money invested? More?
Banks are required to provide you with certain disclosures regarding your accounts, including CD accounts. So the first step in calculating what you might pay for a CD early withdrawal penalty is to review your bank’s policy.
Again, this can vary depending on the bank. So, for example, here’s what one bank charges if you make an early withdrawal from CD accounts. All penalties are deducted from the CD principal.
|CD Term||CD Early Withdrawal Penalty|
|Less than 6 months||90 days of interest on the amount withdrawn, but not more than the total amount of interest earned during the current term of the CD|
|6 months to less than 24 months||180 days of interest on the amount withdrawn, but not more than the total amount of interest earned during the current term of the CD|
|24 months or longer||365 days of interest on the amount withdrawn, but not more than the total amount of interest earned during the current term of the CD|
You should be able to find this information readily available on your bank’s website. But if not, you can contact your bank or visit a branch to get more details on the penalties for early withdrawal from a CD. In addition to telling you what the penalty is, the bank should also be able to tell you how the penalty is calculated.
Banks may calculate the penalty for early CD withdrawal based on:
• The amount withdrawn
• The entire balance
• Daily interest or monthly interest
Want to get a little more granular? Let’s dive into a little basic math to show you how the numbers look. Using Chase as an example, we see that the bank uses the amount withdrawn as the basis for calculating CD early withdrawal penalties. The calculation uses daily rather than monthly interest. So the formula for calculating the penalty you might pay for an early CD withdrawal would look like this:
Penalty = Amount withdrawn x (Interest rate/365) x number of days’ interest.
So, say you have a 12-month CD that’s earning a 2% APY. You withdraw your initial $5,000 deposit six months prior to the CD’s maturity date. The math would look like this:
$5,000 x (0.02/365) x 180 = $49.32
You could also use an online CD early-withdrawal penalty calculator to figure out how much interest you might forfeit if you decide to withdraw money from a CD ahead of schedule.
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Avoiding Penalties From Early CD Withdrawal
There are some options for avoiding prepayment penalties associated with early CD withdrawals. The three main strategies you could try include:
• Withdrawing only the interest earned
• Opening a no-penalty CD account
• Building a CD ladder
It’s possible that your bank may allow you to withdraw the interest earned on a CD without assessing a penalty. This assumes that you don’t touch the principal amount at all. This could be an attractive option if you need some quick cash but don’t necessarily need or want to withdraw your initial deposit.
No-penalty CDs are another option. Banks can offer no-penalty CDs that don’t charge a penalty for early CD withdrawal. The trade-off is that these CDs may offer a lower interest rate and APY compared to other CDs that do impose early withdrawal penalties. So you’d have to consider whether the convenience afforded by no-penalty CDs outweighs earning a higher rate.
Compared to a no-penalty CD, creating a CD ladder could offer a little more flexibility and an opportunity to maximize interest earned. A CD ladder is a collection of CD accounts, each with varying maturity terms. So you might have five CDs with maturity dates spaced six months apart. The idea is that you can avoid early withdrawal penalties because your next maturity date is always on the horizon.
How to Do Early Withdrawal From CDs
So let’s say you have a financial emergency that you just can’t cover with money in your checking and savings. There isn’t a friend or family member with a money tree sprouting bills in their backyard, so you decide you need to withdraw money early from a CD. Regardless of the reason, you may be able to do it by logging into online banking or mobile banking. You’d navigate to the CD account you want to make a withdrawal from, select the withdrawal option, and enter in the amount you want to withdraw. Again, whether you can withdraw a partial amount or whether you’ll be required to withdraw the entire amount can depend on the bank.
Before you complete the withdrawal, the bank will advise you that an early CD withdrawal penalty will apply and the amount. This amount is deducted from the principal of the CD, then the rest is paid out to you. You can transfer the money to another account at the same bank or to a linked account at a different bank. If you withdraw the entire CD in full, this would close that CD account.
When to Withdraw CDs Early
Withdrawing money from a CD early, even if it means triggering an early CD withdrawal penalty, could make sense if you have an emergency situation with no other cash reserves to rely on and you want to avoid using credit. For example, if your car breaks down and you need $5,000 to fix it, then paying a CD withdrawal penalty could be worth it. This move would allow you to avoid having to charge the expense on a credit card or take out a loan at a high interest rate.
Paying a penalty for early CD withdrawal is also something you might consider if the penalty isn’t that steep and you could roll the money into a new CD with a much higher APY. You’d have to calculate the amount of the penalty for withdrawing money early and compare that to the interest you could earn with a new CD to decide if it’s worth it or not.
Investing in CDs can make sense if you want a safe way to earn interest on money you don’t necessarily need for the near-term. But sometimes, you’ll feel you must withdraw money early from a CD, despite the fact that you locked in for a specific term and interest rate. When doing so, you’ll face penalties, which may or may not make this transaction worth it to you. You can also follow a couple of smart money strategies to make sure you avoid triggering early CD withdrawal penalties in the future, because who wants to pay fees unless you absolutely have to?
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How can I withdraw money from a CD early?
If you’d like to withdraw money from a CD early, you may be able to do so by logging into online or mobile banking. You’ll need to select the amount you want to withdraw and where you want the money deposited. You also will have to agree to any early CD withdrawal penalty the bank imposes before completing the transaction.
Can you withdraw a CD before maturity?
It’s possible to withdraw a CD before it matures, but you’ll pay an early withdrawal penalty unless you have a no-penalty CD. The amount you’ll pay to take an early withdrawal from a CD can depend on how long the CD was open and how the bank assesses the penalty.
Does early CD withdrawal affect credit score?
Withdrawing money from a CD early won’t affect your credit score. Your credit scores are based on how you manage debt and depend on such variables as payment history, credit utilization, and applications for new credit.
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