CD early withdrawal penalties: How to avoid them, and when paying one makes sense

Certificates of deposit (CDs) are a smart way to grow your savings, typically offering better rates than high-yield savings accounts. When you open a CD, you agree to keep your money in the account for a set period in exchange for a guaranteed return.

This saving strategy is particularly appealing right now, as interest rates are expected to drop in the coming months. In other words, you can lock in current high interest rates for the length of your term, even as rates on other accounts decline.

The trade-off is that you won’t have access to your money during that time — unless you’re willing to pay an early withdrawal penalty.

What is a CD withdrawal penalty?

A CD early withdrawal penalty is the fee you’ll pay for taking money out of a CD before the term ends (in other words, before the CD matures).

Here’s how it works: Banks and credit unions often offer multiple CD terms with different interest rates. You might see a 1-year CD with a 4.30% APY alongside a 5-year CD with a 4.00% APY. If you choose the five-year option to secure that interest rate for the next five years but need your money about two years into your term, you can withdraw early — but you’ll face a penalty.

Banks charge these fees for two main reasons. First, you’re breaking the contract you made when opening the CD. Second, early withdrawals can disrupt the bank’s investment plans. Banks can offer such high interest rates on CDs because they use your deposits to make their own investments. When you withdraw early, they may need to adjust their investment strategy, potentially earning less than expected.

How CD early withdrawal penalties are calculated

Common penalty structures

Early withdrawal fees vary by bank and depend on factors like term length, APY, and whether you make a partial or full withdrawal. Typically, banks calculate the penalty based on how many days or months of interest you’ll forfeit.

For example, if your CD has a 90-day interest penalty and you withdraw after 30 days, you’ll lose all of the interest you’ve earned over those 30 days, plus what you would have earned over the next 60 days, which the bank will deduct from your principal balance. But if you wait 180 days after opening the account, you’ll only lose half of your earned interest.

Sample calculations

Let’s break down a real example: You open a 24-month CD with a 4.00% APY and deposit $10,000.

After 16 months, you unexpectedly need $5,000 for home repairs. If your bank allows partial withdrawals and charges a 180-day interest penalty on the withdrawn amount, you’d pay about $99 in penalties to take out the $5,000.

However, if the bank doesn’t allow partial withdrawals and requires a full withdrawal of your $10,000 balance, the penalty would double to about $198.

To figure out your potential penalty, calculate your daily interest earnings and multiply that by the number of penalty days your bank charges.

Early withdrawal penalties at major banks

Financial institutions have different rules for early withdrawal penalties. Here are some examples from major banks.

When paying an early withdrawal penalty makes sense

Though paying an early withdrawal penalty isn’t ideal, sometimes paying the fee is the better move. In our earlier example, the penalty ranged from $100-$200 — which might be worth paying in certain situations.

Emergency situations

Life can throw unexpected expenses your way: medical expenses, sudden job loss, or major repairs to your home or car. “For those without an emergency fund, tapping into a CD may be the only option for accessing cash in a hurry,” says Charlie Pastor, certified financial planner and contributing expert at The Motley Fool. “Withdrawing from a CD is often more advantageous than using a high-interest credit card to cover the cost.”

In other words, a few hundred dollars in penalty fees often cost less than thousands in credit card interest.

Financial opportunities

A lot can change in a year or two, and sometimes, better investment opportunities arise. If interest rates rise significantly, you might come out ahead by taking the penalty and moving your money to a higher-yielding account.

Or if you find the perfect home in your dream neighborhood, using your CD funds for a down payment could be worth more than the penalty fees in the long run.

How to avoid early withdrawal penalties

• Emergency funds: Before opening a CD, set aside roughly six months of expenses as an emergency fund in your checking or savings account. With that buffer, it’s less likely that you’ll need to dip into your CD balance early.
• No-penalty CDs: These CDs allow you to withdraw your money early without fees, though they typically offer lower APYs than traditional CDs.
• CD laddering: Instead of putting all your money in one CD, you can spread it across multiple CDs with different terms — say a three-month, nine-month, fifteen-month, and 24-month CD. This strategy ensures that you regularly get access to portions of your money.
• Alternative savings options: Other, more liquid savings options like high-yield savings accounts can offer similar rates. These accounts might be a better fit if you’re unsure about locking away your money.

Frequently asked questions

The bottom line

CDs remain a reliable, low-risk savings tool, especially when interest rates are high. While early withdrawal penalties can be steep, they don’t need to disqualify CDs from your savings strategy automatically. However, in some cases, like when the alternative is high-interest credit card debt, paying the penalty may make sense.