How much do CD penalties cost?
If there's one thing to know about certificates of deposit (CDs) before opening an account, it's that you must be willing to lock up your balance for the entire term. Otherwise, you'll incur a penalty fee.
Also known as an early withdrawal fee, this is the amount that the bank charges you for taking out a portion of your money before the CD term is up. Many banks will also require you to withdraw your entire balance and close the account.
CD penalties can vary, but many banks that offer top CD rates today charge similar amounts — generally a portion of the interest you've earned, which ranges depending on your CD term length.
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How much do CD penalties cost?
The amount you'll pay to withdraw from your CD early depends on the bank, your CD's interest rate and the term length. The fee is typically expressed as an amount of interest earned over a certain number of days. The longer your CD term, the higher the number of days' worth of interest you'll pay.
Take, for example, Marcus by Goldman Sachs. For CDs with terms less than one year, you'll pay 90 days of interest on your principal balance to withdraw early. With a CD term between one year and five years, that goes up to 180 days; for CD terms of more than five years, you'll pay 270 days of interest.
As another example, Bask Bank charges 90 days' interest based on the amount withdrawn for early withdrawals on CDs between six months and one year, and 180 days' interest for CD terms greater than one year. If you've earned less interest than the penalty amount, the fee will be taken from your principal balance.
As you can see, penalty fees can vary from bank to bank. The formulas are similar, even if the exact amount you'll be charged can have a wide range. Here's an example of what an early withdrawal penalty may actually cost you:
Say you put $5,000 in a one-year CD with a 5% APY and an early withdrawal penalty equal to 90 days' interest. Six months into the CD term, you have an emergency and need to withdraw your balance. While you would have already earned around $125 in interest during that time, you will lose around $61.64 on the early withdrawal.
If you have a savings balance you can lock away for the full term, compare top CD rates and start earning more interest today.
How to avoid CD penalties
There are a few simple ways to avoid early withdrawal penalties when you open a CD.
The first is also the most obvious: Don't withdraw any of your money from the account until your CD matures. Before you open a new CD, compare different term lengths to find the right option for you. Remember, a CD may not be the best choice for emergency savings. But they can be ideal for purchases or savings goals that you know are one to five years in the future.
You may also choose to open a no-penalty CD if you're worried about the early withdrawal fee. This type of flexible CD account allows you to withdraw your principal balance and any interest earned at any point throughout your CD term (after an initial waiting period). No-penalty CDs usually have around one-year terms and may earn slightly less interest than standard high-yield CDs.
Another option you may have with some banks is to withdraw your interest earned without penalty, as long as you leave the principal balance in your account. This could be a good option if you have a large balance that earns significant interest, or you simply need to access a portion of the money saved. While this may not result in an early withdrawal fee, you could lose out on the benefit of compounding interest over the lifetime of your CD.
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The bottom line
If you're considering opening a CD account, it pays to know exactly how much you could lose if you need to withdraw early. While each bank varies in the exact terms of its penalty fee, early withdrawals usually cost a portion of the interest earned on your account — and depend on the overall CD term length. Before you open your account, check the account agreement for information about the fee, and make sure you have a goal in mind for your balance so you can avoid early withdrawals altogether.
Learn more about your CD options here and how to score the best interest rates available now.
