Certificates of deposit (CDs) are a practical savings tool. They can pay higher interest rates than savings accounts and are insured by the Federal Deposit Insurance Corp. (FDIC) if taken out at an FDIC-member bank.

The downside of CDs is that you have to keep your money in the account for a certain amount of time, called a term. CD terms can range from a few months to 10 years. If you withdraw money from the CD before the term ends, you likely will have to pay an early withdrawal penalty.

However, there are times when making an early withdrawal from a CD is worth it.

What is a CD early withdrawal penalty?

Part of the process of opening a CD at a bank is choosing the term, which is the length of time you agree to keep your money in the account. It’s like making a promise to the bank that it can hold onto your money for that duration of time.

If you choose to withdraw money from the CD before the term is over, you’re breaking your promise to leave the money in the account. As a result, you’ll usually have to pay a fee called an early withdrawal penalty.

The penalty for early CD withdrawal

The size of the penalty you have to pay will vary based on a few factors, including:

  • The bank: Each bank sets its own early withdrawal penalties. Before you open a CD, it’s worth checking the fine print to see how much the bank will charge if you make an early withdrawal.
  • The CD term: The term of the CD also tends to impact the early withdrawal fee. In general, the longer a CD term, the bigger the penalty.
  • The yield: Most banks charge early withdrawal fees based on the annual percentage yield (APY) the CD pays. You might see CDs with penalties of 90 days of  interest or 180 days of interest. That means the balance of the CD and its interest rate also impact the fees.

Withdrawing money early from a CD is one of the few ways to lose money that’s in an FDIC-insured account. For instance, say a CD charges a penalty of 180 days of interest. If you make a withdrawal three months after you opened the CD, you’ll forfeit all of the interest you’ve earned and pay the rest of the fee out of the principal you deposited.

Here are some examples of standard CD early withdrawal penalties.

Financial institution 5-year CD 3-year CD 1-year CD
Ally Bank 150 days of interest 90 days of interest 60 days of interest
Bank of America 365 days of interest 180 days of interest 180 days of interest
Capital One 360 6 months of interest 6 months of interest 3 months of interest
Bread Savings 365 days of interest 180 days of interest 180 days of interest
Discover 18 months of interest 6 months of interest 6 months of interest

To calculate the amount you’ll pay in an early withdrawal penalty, determine how much interest you’re earning in a day or a month, and then multiply that amount by the number of days or months of interest you forfeit.

When is it a good idea to make an early withdrawal on a CD?

In many cases, it makes sense to leave your money in a CD for the full term to avoid having to pay the early withdrawal penalty. However, there are times when you decide paying the penalty is worth it.

One example would be when you need the money to cover an emergency expense. If your car breaks down or you’re facing a medical bill you can’t otherwise pay, it’s often better to take the hit and use the money in your CD to pay the bill. Not paying the emergency expense could cost you more than a CD penalty: It could end up costing you interest and damage your credit.

Another case when an early withdrawal from a CD is worth it is to make a down payment on a major purchase, such as a home or car. A bigger down payment reduces the size of your loan, which means you pay less interest. A CD early withdrawal penalty may be paltry in comparison with how much you could save by taking out a smaller mortgage or auto loan.

When rates rise significantly

When you open a CD, you lock in the interest rate for the entire term. If you open a CD when rates are low and rates then rise in a big way, it may be worth breaking your CD to secure a higher rate.

For example, let’s say that breaking your current CD will result in a $25 early withdrawal fee. However, you might find that a new CD with a higher APY will ultimately earn you $75 more in interest than the original CD. You’d come out ahead by making the early withdrawal and opening the new CD.

If you believe interest rates will be rising, it can pay to open a short-term CD so you aren’t tying up your money for very long. At times when long-term CDs are paying higher APYs than short-term ones, you could build a CD ladder. This way, you’ll benefit from the longer-term CDs’ higher rates while being able to reinvest the money sooner from the shorter-term CDs.

Consider investing in a no-penalty CD

No-penalty CDs offer the benefits of traditional CDs: locked-in interest rates and higher rates than many savings accounts, but with fewer downsides. The primary difference is that you can take your money out of the account without paying a penalty.

Note, however, that no-penalty CDs often earn rates that are lower than traditional CD rates. But the benefit of greater liquidity may outweigh the cost of a slightly lower rate.

Avoid investing money that you may need access to

It’s important to remember that when you open a CD, you’re making a commitment to keeping your money in the bank. While most CDs are FDIC-insured, you should consider them an investment.

A top piece of advice when investing in the stock market is to only invest money you can afford to lose. Similarly, a best practice with CDs is to only deposit funds you can afford to part with for a set amount of time. As such, it’s best to have a well-established emergency fund before putting money into a CD.

— Libby Wells wrote a previous version of this story.