Here’s when an early withdrawal from a CD is worth it

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Certificates of deposit can be a great place to save your money. CDs can pay higher interest rates than savings accounts, while still receiving insurance from the Federal Deposit Insurance Corp.

The drawback of CDs is that you have to make a commitment to keep your money in the account for a certain amount of time. Each CD has a term, usually ranging from a few months to a few years. If you try to withdraw money from the CD before its term ends, you might have to pay a penalty.

However, it could be worth making an early withdrawal from a CD, despite the cost.

What is an early withdrawal penalty?

When you put money in a CD, you choose a term, like 12 months or 3 years. The CD’s term is how long you plan to keep your money in the account. Think of it like making a promise to the bank for that length of time.

If you try to withdraw money from the CD before the term is over, you’re breaking the promise you made to keep your money in the account. As payment for breaking that promise, you usually have to pay a fee. It’s called an early withdrawal penalty.

The cost of an early 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 account’s fine print to see what fees the bank will charge if you have to 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’s term, the larger the penalty will be.
  • The yield: Most banks charge early withdrawal fees based on the interest the CD pays. You might see fees described as three months’ interest or 180 days’ interest. That means the balance of the CD and its interest rate also impact the fees.

Making an early withdrawal from a CD is one of the few ways to lose money deposited in an FDIC-insured account. If a CD charges a penalty of six months’ interest and you make a withdrawal three months after opening the account, you’ll have to forfeit all of the earned interest and pay the rest of the fee out of the principal you deposited.

Here are some examples of 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 90 days of interest
Santander Bank 365 days of interest 6 months of interest 3 months of interest
Capital One 360 6 months of interest 6 months of interest 3 months of interest
Discover 18 months of interest 6 months of interest 6 months of interest

To calculate the amount you’ll pay in early withdrawal penalties, you need to find how much interest you earn each day or month, then multiply it by the number of days/months of interest you forfeit.

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

Making an early withdrawal from a CD means paying a penalty. In most cases, it makes sense to leave money in the CD, even if making an early withdrawal is tempting.

The most common scenario where making an early withdrawal makes sense is if you need the money to cover an emergency expense. If your car breaks down or you’re facing a medical bill you can’t pay, it’s often better to take the hit and use the money in your CD to pay the bill. The alternative of ignoring the bill means paying interest and penalties and damaging your credit.

Another reason that it might be worth paying the fee is if you have to make a large purchase, such as a down payment on a home or a car. Paying the penalty isn’t ideal, but if making an early withdrawal makes the difference between being able to make the important purchase or not, you may have to accept the penalty and make the withdrawal.

A rarer situation is when interest 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 they rise by a significant amount, it may be worth breaking your CD to secure a higher rate.

For example, if you have to pay a $25 early withdrawal fee, but a new CD with a higher interest rate will give you an additional $75 in interest, you come out ahead by making an early withdrawal and opening a new CD. However, situations where rates move so drastically are very uncommon.

If you’re worried about fluctuations in interest rates in the future, your best bet is likely to open short-term CDs so you can get penalty-free access to your funds more frequently.

Consider investing in a no-penalty CD

There are other options for savers who want to avoid paying early withdrawal fees, including:

  • No-penalty CDs
  • Covid relief programs
  • CD ladders

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. Hence the name.

You also have other options for reducing the odds that you’ll have to pay an early withdrawal penalty. Many banks are waiving fees as part of their COVID-19 relief plans.

You can also try establishing a CD ladder, which involves opening multiple CDs with different terms. If you structure the ladder properly, you’ll have more frequent access to some of your money.

Avoid investing money that you can’t afford to lose access to for a period of time

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

When you invest in the stock market, one of the top pieces of advice is to make sure you only invest money that you can afford to lose. Similarly, when opening a CD, only deposit funds that you can afford to not have access to for a set amount of time. For example, if you don’t have an emergency fund, you should probably build one before putting all your savings in a CD.

Once you’re financially stable and know that you can afford to lock away some of your savings for months or years at a time, you can start considering a CD.

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Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Senior wealth editor