Rebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Written By Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Rebecca Lake Banking ExpertRebecca Lake is a certified educator in personal finance (CEPF) and a banking expert. She's been writing about personal finance since 2014, and her work has appeared in numerous publications online. Beyond banking, her expertise covers credit and deb.
Banking Expert Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
Doug Whiteman Personal Finance EditorDoug Whiteman is an award-winning journalist with three decades of experience covering personal finance, starting when he was the Washington, D.C.-based consumer news editor and reporter for Associated Press Radio in the 1990s and early 2000s. He's p.
| Personal Finance Editor
Updated: Jul 19, 2024, 2:00pm
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Certificates of deposit (CDs) can be an excellent savings vehicle for anyone who wants stability and guaranteed growth. These low-risk investments offer the protection of the Federal Deposit Insurance Corporation (FDIC) and a higher interest rate than you generally can find with savings or money market accounts.
There’s one thing to be aware of: early withdrawal penalties. Banks and credit unions often charge a fee if you withdraw money before maturity. Understanding how early withdrawal penalties work is essential when deciding if a CD is right for you.
A CD is a type of time deposit account. When you open a CD, you agree to keep your money on deposit with the bank for a certain term. Minimum deposits for CDs can range from $0 to $10,000 or more. And banks offer CDs with terms ranging from 28 days to 10 or more years. Credit unions also offer CDs, though they’re typically called “share certificates.”
In exchange for keeping your money in the CD, the institution pays interest on your deposit. The interest rate you earn depends on the institution and the term. Typically, the longer the term, the higher the interest rate. Interest compounds often daily or monthly, depending on your bank or credit union.
Once the CD matures, meaning it reaches the end of its term, banks and credits may offer a few options:
Institutions want to discourage CD holders from withdrawing money before the maturity date, since the financial institution counts on both your principal and its growth. When the bank knows how long it can use your money, it can keep its costs low.
Withdraw your money before the maturity date and it could expose the bank to financial penalties on the money it has invested or loaned out. This is why, in most cases, you’ll pay a CD early withdrawal penalty for taking money out before maturity.
FEATURED PARTNER OFFERAnnual Percentage Yield
Minimum Deposit Requirement
On Discover's WebsiteCDs typically don’t have any type of monthly maintenance fee. You may pay no fees at all for a CD unless you’re withdrawing money from the account ahead of the maturity date.
Early withdrawal penalties for CDs vary by financial institution. CD early withdrawal penalties are typically calculated as a set period’s worth of interest. For instance, you may see the penalty listed as “90 days of interest” or “12 months’ interest.” The amount of interest you forfeit can depend on the CD term and how long the CD has been open.
Many banks calculate your penalty as a number of days’ simple interest at the rate currently in effect on the CD. That means the early withdrawal penalty doesn’t factor in the compounding of interest over time. Instead, you pay the straight interest over that time. However, there is no cap on early withdrawal penalties imposed by the federal government, which is why it’s worth reading the fine print on your CD information.
Unfortunately, even though banks and credit unions define penalties in terms of interest, your principal isn’t necessarily safe. If your accrued interest is less than the penalty’s total amount, your financial institution may take the difference from your principal.
Calculating the early withdrawal penalty for a CD can depend on several factors::
For example, let’s say you have $10,000 in a 5-year CD earning an interest rate of 1.00%. The early withdrawal penalty for a 5-year CD at this institution is 150 days’ interest, and you’re not allowed partial early withdrawal, so you will have to take out the full amount. Here’s how you would calculate your withdrawal penalty:
Penalty = Account Balance x (Interest Rate/365 Days) x Number of Days’ Interest
Penalty = $10,000 x (0.01/365) x 150 Days’ Interest = $41.10
Let’s say in the scenario above you face an early withdrawal penalty of 18 months’ interest. Here is how you would calculate your penalty:
Penalty = Amount Withdrawn x (Interest Rate/12 Months) x Number of Months’ Interest
Penalty = $10,000 x (0.01/12) x 18 Months = $150
Check to see if your bank has a minimum early withdrawal penalty. In many cases, your financial institution will require a minimum penalty, such as $25, if the total calculated penalty is below that threshold.
It’s essential to understand how the biggest banks levy early withdrawal penalties on CDs. While many banks charge penalties using simple interest, some do not specify whether their penalty is simple or compound.
Here’s an overview of CD early withdrawal penalties at some of the top banks:
90 days’ simple interest
Although early withdrawal penalties are common with CDs, there are ways to avoid paying them.
You may be able to withdraw a partial amount or the full amount from a CD before its maturity date, depending on your institution’s early withdrawal policies. For example, some CDs will allow you to access some or all of the interest you have earned without touching the principal.
In some cases, you will specify when you open the CD whether you would prefer the interest to compound within the CD or receive the interest paid to you in regular disbursements. The downside of choosing interest disbursements is that the interest will not compound, and you will only earn simple interest on your principal. But you do get some flexibility with this type of arrangement.
Even if your interest compounds, you may still be able to access your earned interest without paying an early withdrawal penalty. Each bank has its own rules about accessing your accrued interest, so it’s worth looking into what your institution allows.
Keep in mind that while some banks will not allow CD owners to make a partial early withdrawal, others do permit these types of withdrawals. If your financial institution allows for partial early withdrawals, you will only owe interest on the portion you withdraw, and you can leave the balance invested in the CD.
A no-penalty CD is another option for consumers who want the benefits of a CD with the flexibility to access their money at any time. These CDs allow account holders to withdraw their money penalty-free at any time. For example, a bank may allow you can take an early withdrawal after the first six days of funding the CD with no penalty.
The downside to no-penalty CDs is their APY, often less than their traditional CD counterparts. Also, you may not be able to make partial withdrawals from a no-penalty CD. If you need some money, you may have to take out your entire principal, plus whatever interest you have earned, and close the account.
However, even with these downsides, no-penalty CDs may offer a better APY than savings accounts, and your interest rate is guaranteed. If you need flexibility, a no-penalty CD may be a great option.
CD ladders offer a way to get the best of these vehicles while maintaining your flexibility. To create a CD ladder, you will open several CDs, each with different maturity dates, rather than putting all of your investment into a single CD.
For instance, let’s say you have $5,000 total that you would like to put into CDs. Your ladder may look like this:
As each rung of the CD ladder matures, you can then choose to roll the money over into another CD or withdraw it.
While having a CD ladder can’t protect you from the kind of sudden financial emergencies that may prompt you to make an early withdrawal, it still can help you minimize penalties. If you keep your ladder’s maturity dates relatively close together, you’ll know that you don’t have to wait for more than a few months for the next CD to mature. If your financial need can wait until the next maturity date, you won’t trigger a penalty for early withdrawal.
Even if you break one of the CDs in your ladder, you’ll only pay the penalty on that single CD, meaning the majority of your investment will still enjoy compounding interest with no penalties.
Many banks will waive the penalty entirely in case of the account holder’s death, disability or legal incompetence. This rule helps any family in need of money in the wake of their loved one’s death or incapacitating incident.
