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Stephen Kates, CFP®
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- Published: March 21, 2023
- Updated: July 10, 2023
- 7 min read time
- This page features 8 Cited Research ArticlesKey Takeaways
- Majority of CDs have an early withdrawal penalty if you access your money before the CD matures. This penalty could cancel out your hard-earned interest and negatively impact your retirement savings.
- You should carefully read your issuer’s fine print about penalties before opening a CD to avoid hefty penalties.
- The early withdrawal penalty is taken out of your interest or a fixed dollar amount, typically whichever is higher. For example, with a one-year CD from Truist bank, the early withdrawal penalty would be three months of simple interest earned on the principal amount withdrawn or $25, whichever is greater.
- There are strategies to avoid an early withdrawal penalty, like purchasing a liquid CD or laddering your CDs.
How CDs Work
A certificate of deposit (CD) helps your retirement savings maintain buying power with little to no risk. You deposit a set amount for a fixed term and for a fixed interest rate from a bank or credit union. Terms can be short (three months to a year) or longer (18 months, two years, three years or five years) or longer.
When your CD’s term ends, it reaches its maturity. That’s when you get the return of your principal along with the interest you’ve earned. Because CDs offer guaranteed returns, they’re a popular savings tool for people planning to retire or for someone looking to diversify a future retirement portfolio.
CDs offer higher interest rates than cash accounts like money market accounts and savings accounts because you agree to leave your money in the issuer’s hands for a specified term. If you break the original agreement and need to get access to your money before your CD matures, you’ll likely face an early withdrawal penalty.Before purchasing a CD, consider your cash emergency fund and whether its adequate to buffer any financial needs over the term of your CD. You should not buy a CD if you expect to need some of that money before the CD matures.
Early Withdrawal Penalties
If you tap into your CD’s funds before it reaches maturity, you’re likely to face an early withdrawal penalty. Typically, the early withdrawal penalty will give a certain amount of your interest back to the issuer.
Banks are required by law to excise an early withdrawal penalty if funds from a CD get withdrawn by an owner before it matures, according to the Office of the Comptroller of the Currency. While federal law sets a minimum penalty for early withdrawal from CDs — seven days of simple interest if you make a withdrawal within six days of opening the CD — there is no maximum penalty.
The early withdrawal penalty sometimes reduces the principal of the investment, according to Discover Bank. Confirm whether your principal or interest will be penalized before opening a CD and verify if the penalty will affect the total balance of your CD or just the amount you’re withdrawing. Generally, the longer your CD’s term is, the higher the penalty for interest will be.
“There is no average amount for the early withdrawal penalty. Penalties are based on the term of the CD and the banks that issue them,” co-founder of Planable Wealth Cameron Valadez, CFP®, CPFA, AWMA®, told RetireGuide. “They usually describe it in terms of ‘x number of days of interest.’ For example, 60 days of interest for an early withdrawal penalty.”
With Ally Bank, for example, you’ll get penalized 150 days of interest if you withdraw from your five-year CD early. You’d only be penalized 60 days of interest with a one-year CD. Below is a table comparing popular banks’ early withdrawal penalties for CDs.CD Early Withdrawal Penalties for Different IssuersBanking for Seniors: Managing Your Finances With Confidence
Issuer One-Year CD Three-Year CD Five-Year CD Chase 180 Days of Interest 365 Days of Interest 365 Days of Interest Bank of America 90 Days of Interest 180 Days of Interest 365 Days of Interest Ally 60 Days of Interest 90 Days of Interest 150 Days of Interest
Because the goal of a CD is a fixed guaranteed return, an early withdrawal penalty can erase the main purpose of using a CD to increase your retirement funds. Once you know the exact penalty from your issuer, you can use a simple calculation to determine how much you’d lose if you had to tap into your funds too soon.Never Miss Important News or Updates with Our Weekly NewsletterGet money-saving tips, hard-to-find info and tactics for a successful retirement in our free weekly newsletter.
Exceptions to Early Withdrawal Penalties
There are four primary exceptions to early withdrawal penalties for CDs. If the CD owner passes away or gets declared legally incompetent by a court or other body of competent jurisdiction, the issuer won’t attach a penalty.
The second exception to avoiding an early withdrawal penalty is purchasing a liquid CD. Also known as a no-penalty CD, a liquid CD lets you use your money at any point during the CD’s term without penalty. Because liquid CDs provide less risk, they offer lower interest rates compared to traditional CDs.
You can also request a CD penalty waiver from your issuer, according to the Office of the Comptroller of the Currency. You must explain why you need to make the withdrawal and must have your issuer find your reasoning sound to get the penalty waived.
Some CDs also come with exceptions. For example, Alliant Credit Union’s IRA CD has a no-penalty clause if you become disabled or after you reach age 72.Common CD Early Withdrawal Penalty Exceptions
- The owner of the CD passes away or is determined legally incompetent
- The owner of the CD becomes disabled
- Your issuer finds your reason for early withdrawal reasonable
Considerations before Withdrawing Early
Consider your options before you withdraw any money early from your CD. Ask if there are other alternative savings vehicles without penalties you could pull from first. How much of a financial hit will your retirement savings take if you tap into your CD early?
You can talk with a financial advisor to determine your next best move. Read your CD’s fine print to make an informed decision.
You could also find yourself in less of a risky situation if you laddered your CDs. CD laddering is a tactic of buying multiple CDs with different maturity dates at the same time. You could do this by purchasing a three-month CD, a six-month CD, a one-year CD and a three-year CD. Your CDs will mature regularly. When they do, you can decide to use the cash with no penalty attached or buy another CD for a specific term.
With laddered CDs, it’s reasonable to hold off withdrawing early since you have faster access to your money. If you had a single five-year CD, you could be in a bind if you need your money soon before the five-year mark. Consider your long-term retirement goals before withdrawing from your CD early to avoid unnecessary penalties.
Consult a Financial Advisor
Consulting with a financial advisor can be a key element of a sound retirement plan. Everyone has different needs and incomes to account for. A financial advisor can help you personalize your retirement plan and read the fine print of your CD’s early withdrawal penalty.
CD early withdrawal penalties are complex and easy to dismiss when planning for retirement. You may think there’s no way to get your money before the term ends. But in times of high inflation and post-pandemic stress, there may be unavoidable and unexpected financial stressors.
You should research your issuer’s early withdrawal penalty before opening a CD. Determine if your investment portfolio could take the financial hit if you end up needing to access your money early. You should also have a backup plan prepared to reinvest funds to make up for any lost interest or principal.3 Minute Quiz: Can You Retire Comfortably?Take our free quiz & match with a financial advisor in 3 easy steps. Tailored to your goals. Near you or online.
FAQs About Early Withdrawal Penalties on CDsCan you avoid early withdrawal penalties by transferring a CD to another bank?No, you can’t avoid early withdrawal penalties by transferring your CD to a different bank. To transfer the CD, you’d need to tap into your funds early, which would initiate the early withdrawal penalty.How do CD early withdrawal penalties impact retirement savings?A CD early withdrawal penalty can minimize the interest earned going toward your retirement savings. In some cases, you can even lose a part of your principal. Either way, an early withdrawal penalty takes retirement funds from your pocket and gives them to a financial institution instead.Are there any alternatives to CDs that don't have early withdrawal penalties?Liquid CDs or traditional savings accounts are alternatives to traditional CDs and don’t carry early withdrawal penalties. While they don’t have as high of an interest rate as a traditional CD, you won’t risk your hard-earned savings getting hit by hefty penalties.Advertisement
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8 Cited Research Articles
- Office of the Comptroller of the Currency. (2021, April). I cashed my certificate of deposit (CD) before it matured, and the bank charged me an early withdrawal penalty. Can it do this? Retrieved from https://www.helpwithmybank.gov/help-topics/bank-accounts/certificates-of-deposit/cd-early-penalty.html
- Office of the Comptroller of the Currency. (2021, April). What are the penalties for withdrawing money early from a certificate of deposit (CD)? Retrieved from https://www.helpwithmybank.gov/help-topics/bank-accounts/certificates-of-deposit/cd-penalties.html
- Office of the Comptroller of the Currency. (2021, April). Will I have to pay a fee or penalty if I need to withdraw funds from my certificate of deposit to pay expenses related to COVID-19? Retrieved from https://www.helpwithmybank.gov/help-topics/covid-19/cd-accounts/cd-fee.html
- Alliant Credit Union. (n.d.). Are there any exceptions to the certificate early withdrawal penalty? Retrieved from https://www.alliantcreditunion.org/help/are-there-any-exceptions-to-the-certificate-early-withdrawal-penalty
- Ally. (n.d.) Certificates of Deposit (CDs) FAQs. Retrieved from https://www.ally.com/help/bank/cds/
- Bank of America. (n.d.). CD & IRA FAQs. Retrieved from https://www.bankofamerica.com/deposits/bank-cds-and-iras-faqs/
- Chase Bank. (n.d.). Certificate of Deposit. Retrieved from https://www.chase.com/personal/savings/bank-cd
- Discover. (n.d.). Online Banking FAQ. Retrieved from https://www.discover.com/online-banking/faq/cd/
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