CD Early Withdrawal Penalty: What to Know and How to Avoid It

Certificates of deposit generally have only one type of fee: an early withdrawal penalty. CDs, unlike other bank accounts, require you to lock up a fixed sum of money for a set period of months or years. So breaking the seal is what can cost you. Here’s how this penalty works and how to avoid it.

» Skip down to see a list of CD penalties by bank

What is a CD early withdrawal penalty?

A CD's early withdrawal penalty is the interest that a CD earned (or would have earned) over a specified number of days or months. (The penalty’s equivalent at credit unions is the dividends that a certificate earned or would have earned.) This charge is trickier to figure out than other bank fees because it’s not typically written as a fixed dollar amount or percentage of a transaction.

What does a CD early withdrawal penalty cost?

The penalty varies by bank and can even depend on the CD term at the same bank. Longer CD terms, such as for four and five years, can have higher penalties than short-term CDs, such as one year or shorter. And the earlier you withdraw money from a CD, the less interest you'll earn. Sometimes if a withdrawal is early enough, a penalty can include part of the principal, or the initial sum of money you deposited, meaning you can lose money on a CD.

» CALCULATE: Use our CD early withdrawal penalty calculator

Here’s how it works: Say you have a two-year CD that has an early withdrawal penalty of six months of interest. If you cash out the CD after seven months, you forfeit interest from the first six months and are left with one month of interest. If you have that same CD with the same penalty but withdraw after just three months, the penalty would dip into the principal.

» Learn more: What is a CD?

An early withdrawal’s other cost: future interest forfeited

Many banks don’t allow partial withdrawals, so when you break the seal, the whole CD ends. In effect, an early withdrawal means missing out on the rest of a CD's interest that you could’ve earned. Withdrawing early generally means both paying a penalty and losing remaining interest. If you want to see how the two costs add up, use our CD early withdrawal penalty calculator to plug in your own scenarios.

» Withdrawing early for a better CD rate? Consider when breaking a CD early pays off

What CD early withdrawal penalties cost at some big banks

» See the full list of penalties at 26 institutions on our CD early withdrawal penalty calculator

Strategies to avoid a CD penalty

Before opening a CD, assess your options to ensure you don’t lose a chunk of your money to a penalty.

1. Wait for your CD to mature

This is the most common way of avoiding a penalty, since you’re using a CD as designed. When CDs mature, you often have a seven- to 10-day window of time, called a grace period, to withdraw (learn more about CD grace periods). After that, many banks automatically renew a CD, so keep a close eye on your maturity date. Aim for shorter-term CDs if a long wait to access funds doesn’t work for you.

2. Open a no-penalty CD

No-penalty CDs don’t charge for withdrawing before maturity. They aren’t as common as regular CDs and tend to have terms close to one year. Their main downside is that rates tend to be lower than those of other CDs. And, like other CDs, there are no partial withdrawals. But having the peace of mind that you can withdraw fee-free nearly whenever can be worthwhile. If you're curious, check out the best no-penalty CDs.

3. Opt for a CD ladder

If you want the high returns of long-term CDs and the flexibility to access cash of short-term CDs, you can try a CD ladder strategy. It works like this: Open several CDs — potentially up to five or more — with staggered term lengths such as one year, two years, three years and so on. When each CD matures, reinvest those funds into a new long-term CD, such as one with a five-year term. Eventually, you'll have one long-term CD maturing every year, giving you access to some savings in case of emergencies. Your CD funds also won't be locked into just one rate of return, which is a good thing if interest rates start to climb. For more about CD strategies, view our guide to how to invest in CDs.