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How to avoid a CD early withdrawal penalty

Avoid paying a penalty for early withdrawal of your CD with these four tips.

CDs can be a safe way to lock in a high interest rate. But you’ll pay a hefty penalty if you need to withdraw funds before it matures. There are four major ways to avoid paying a CD early withdrawal penalty:

1. See if you qualify for a waiver

Most banks waive the CD early withdrawal penalty under extreme circumstances, such as when the owner retires, dies, becomes disabled or is legally incompetent. If you’re facing a situation like this, contact your bank to see if you qualify for a waiver.

2. Call the bank and ask

If your situation isn’t extreme enough to warrant a waiver, it still doesn’t hurt to call and ask the bank if there’s any way to waive the penalty. Sometimes smaller institutions — or bigger institutions that you’ve been with for a while — will waive the penalty if you’re facing an emergency and need cash now. Call them up, explain your situation and see if there’s anything they can do to help. The worst they could say is no.

3. Ladder your CDs

If you haven’t opened a CD yet and want to avoid future penalty fees, consider laddering your CDs. When you ladder CDs, you stagger your money across various terms, so you have access to funds on a rolling basis. For example, let’s say you have $10,000 to stash away in a CD. Instead of putting all $10,000 in one CD, you put $2,000 each in a one-year, two-year, three-year, four-year and five-year CD. Now you can withdraw funds for free once a year. If you wanted to have even more access, you could buy CDs in six-month increments. That way you have access to funds twice a year.

4. Choose a no-penalty CD

Some banks offer no-penalty CDs, which don’t ding you for pulling your money out early. For example, Ally Bank’s No Penalty CD lets you withdraw your money for free at any time after the first six days your account has been open. But as with most no-penalty CDs, the APY is lower than what you’d earn with other CD options.

Compare penalty-free CDs

Use the table to compare CDs with no early withdrawal penalties. Once you’ve chosen your top picks, click the “Compare” box next to each one for a side-by-side comparison view.

Name Product 11-month APY 13-month APY
Ally No Penalty CD
0.6%
CIT Bank No-Penalty CD
0.3%
Enjoy the security of a CD while still having access to your funds. 11 month term with a 0.3% APY and $1,000 minimum deposit.
PurePoint No-Penalty CDs
0.15%
0.1%
Citi No Penalty CD
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Compare up to 4 providers

Why do banks impose CD penalties?

The fixed nature of a CD has benefits for banks as well as for customers. When you agree to invest a specific amount of money with a bank for a set period, the bank is more than happy to receive those funds because it can lend them out to mortgage and loan borrowers until your term is up.

However, when you decide to break your CD and withdraw funds ahead of schedule, you’re breaking the agreement you have with your bank, and it will impose fees to help cover any funding shortfall.

What is the penalty for withdrawing a CD early?

Individual banks set their own early withdrawal penalties, and it’s a good idea to check what they are before opening an account. Here are what some popular banks will charge you if you withdraw your CD early:

Financial institution6-month CD1-year CD3-year CD5-year CD
Chase180 days’ interest180 days’ interest365 days’ interest365 days’ interest
Bank of America90 days’ interest180 days’ interest180 days’ interest365 days’ interest
Wells Fargo90 days’ interest90 days’ interest365 days’ interest365 days’ interest
Citibank90 days’ interest90 days’ interest180 days’ interest180 days’ interest
Capital One90 days’ interest90 days’ interest180 days’ interest180 days’ interest
American Express90 days’ interest270 days’ interest365 days’ interest540 days’ interest
Ally Bank60 days’ interest60 days’ interest90 days’ interest150 days’ interest
Marcus by Goldman Sachs90 days’ interest270 days’ interest270 days’ interest270 days’ interest
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5 things to consider before opening a CD

These tips will help you choose the right CD based on your needs and goals:

  1. Plan ahead. Consider your future financial needs and whether you’ll likely need to access your money before maturity. It’s a bad idea to put your entire savings into a CD — if possible, set aside an emergency fund in a more accessible account before opening a CD.
  2. Make use of introductory periods. Some providers will let you withdraw your money during the first week or two without incurring a fee. If you invest in a CD and have immediate buyer’s remorse, check to see if your bank lets you opt out during an introductory period.
  3. Pay attention to the minimum balance. If you try to withdraw a partial amount and your account balance goes below the minimum limit, your account could be automatically closed and the interest rate reduction could apply to the entire balance.
  4. Read the fine print. Many banks don’t allow partial withdrawals at all— if you want access to your money, you’ll have to withdraw all of it and close the account.
  5. Consider other opportunities. While it’s impossible to predict the future and the emergencies that may arise, you may decide that you may be better off opening an online savings account that provides easy access to funds whenever you need them. Even if you do decide to use a CD, it’s a good idea to have a savings account, too.

How to calculate the early withdrawal penalty for a CD

To calculate how much the penalty for an early withdrawal would be, divide the amount of interest by 365 days in a year and multiply it by the amount of days you’ll be penalized for. For example, if you open a one-year CD with $1,000 that earns 0.5% APY and its withdrawal penalty is equal to 90 days’ worth of interest, you’d first need to find out how much interest you’d earn. You can use a CD calculator to determine this. In this case, you’d earn $5.01 back in interest. Then use this formula to determine what your penalty would be:

Total interest earned / 365 days x days worth of interest penalized
5.01 / 365 = 0.0137
0.0137 x 90 = 1.235

In this case, your penalty for withdrawing early would be $1.24. You can use similar math to calculate your specific penalty, but be mindful that if your bank’s penalty is calculated based on months rather than days, you’ll divide by 12 rather than 365 and you’ll multiply by the number of months, not days.

Is an early withdrawal penalty on a CD worth it?

In general, early withdrawal penalties are not worth it. That’s because, in many cases, the penalties erase a significant percentage of the interest the CD earns. That’s why you should never get a CD with funds you think you might need before the CD reaches maturity. If there’s any chance you’ll need to access the money in the near future, deposit it into a high-yield savings account instead of a CD to avoid paying fees.

Bottom line

Before you open a CD, be aware of any penalties that will apply if you need to make an early withdrawal. Consider a penalty-free CD for peace of mind if you think you might need to access your money before the term ends.

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