How to avoid a CD early withdrawal penalty

How CDs work

A certificate of deposit is a type of time deposit account where your money is locked in for a specific period. When you place your money in a CD, you can’t access the funds before the CD matures without paying a fee. The maturity date can be as short as a few weeks or as long as several years.

• CDs are ideal for saving money you don’t need to access for a long time — for example, money set aside for a down payment on a home or a college fund. Since you agree to lock the funds for a fixed period, you’ll often earn higher interest rates on CDs compared with other deposit accounts.
• CDs are not a good place to set aside money you might need to use unexpectedly, such as an emergency fund. You’ll usually need to pay an early withdrawal penalty to access the funds in a CD before its maturity. Savings and money market accounts are better choices for funds you want to access as needed, without penalty.

How much are CD early withdrawal penalties?

Each financial institution sets its own early withdrawal penalties. However, at a minimum, they are required to charge a penalty of at least seven days’ simple interest if you take money out of the CD within six days of depositing it into the account.

“Different banks have different policies, so it's essential that you review your paperwork before signing,” said Anthony Martin, CEO of the insurance agency Choice Mutual.

“A fixed-rate CD usually has a penalty of a certain number of months of interest, typically three or six months, if you withdraw your money before the maturity date,” Martin said. “A variable-rate CD usually has a percentage penalty on the amount withdrawn, such as 1% or 2%, if you withdraw before a specific date.”

There are also no-penalty CDs that allow you to withdraw before the maturity date without penalty. However, Martin cautioned that “these CDs usually have a much lower interest rate.”

CD withdrawal penalty examples

The following are three examples of how much you might pay under different early withdrawal penalty scenarios for a CD with a one-year maturity:

6 ways to avoid an early withdrawal penalty

If you want to open a CD but are concerned about the early withdrawal penalty, don’t fret — there are ways to avoid the fee. The simplest method, of course, is to simply not withdraw your funds early, but we all know that’s easier said than done.

Here are a few of the best ways to avoid early withdrawal penalties:

Don’t withdraw early

While this may seem obvious, the best way to avoid an early withdrawal penalty is to keep your funds in the CD until it matures. Once the CD matures, you can withdraw the funds and use them however you’d like.

Choose the right term length

You can choose from many different CD terms, from as short as a few weeks to as long as multiple years. If you’re not confident you can keep the money locked up, don’t choose a long term for your CD.

While you may earn a lower interest rate on a shorter-term CD, you might earn more money in the long run if you avoid paying an early withdrawal penalty. Also, you might have peace of mind knowing you can access the funds and reevaluate how long to keep them locked up the next time the CD matures.

Opt for a no-penalty CD

Although most CDs carry an early withdrawal penalty, there are a few no-penalty CDs available on the market. With a no-penalty CD, you won’t pay a penalty if you take money from the CD after the first six days of depositing it. While banks must charge an early withdrawal penalty for the money you take out in the first six days, penalties beyond this are at their discretion.

Since your funds aren’t locked in for long, you may earn a lower interest rate on a no-penalty CD. However, you won’t have to worry about paying a penalty if you need to access your funds before the CD’s maturity date.

No-penalty CDs don’t charge you if you need to withdraw after the first six days of depositing, but they often come with lower interest rates.

Try CD laddering

CD laddering is opening multiple CDs with staggered maturity dates. The goal is to always have access to some of your money while still earning high rates.

For example, say you have $12,000 to put in CDs and always want access to $1,000. To do this, you could open 12 CDs and put $1,000 in each. For the first year, you could set maturity dates one month apart for each CD (one month for the first CD, two months for the second CD and one year for the 12th CD). Each month, a CD will mature with funds you can use as needed.

“Planning is the best prescription to avoid early withdrawal penalties. If you put all your savings into the highest rate available, you may have painted yourself into an illiquid corner,” said Paul Tyler, the chief marketing officer at Nassau Financial Group.

“It’s much safer to adopt a laddering strategy where you invest your savings in a string of shorter- to longer-term duration CDs. You may give up a few points in interest, but you have created a number of opportunities over the coming years to get access to your savings without penalty.”

Ask about a waiver

In some cases, your bank or financial institution may be willing to waive the early withdrawal penalty. If your funds have been in the CD for at least seven days, your bank is permitted to waive the early withdrawal penalty. (Whether it’s willing to depends on its internal policies).

If an extenuating circumstance (death in the family, illness, job loss) led to the withdrawal, it’s at least worth asking your bank if it’s willing to waive the fee.

Use an alternate account

Another way to avoid paying an early withdrawal penalty is to choose a different account type. You might consider three alternatives: high-yield savings accounts (HYSAs), money market accounts (MMAs) or bonds.

HYSAs and MMAs

HYSAs and MMAs are good options for building emergency funds or saving money you want to access easily and without penalty. These accounts are equally safe as a CD, as they’re backed by deposit insurance when opened at an institution insured by the Federal Deposit Insurance Corporation or National Credit Union Administration.

Additionally, their value will never go down, as your returns are tied to the interest rate the financial institution agrees to pay you, not to an index like the stock market or a bond market.

» MORE: CDs vs. savings accounts: Which is right for you?

Bonds

You can buy bonds through a brokerage account. You’ll sell the bond when you’re ready to cash out your investment. The catch is, unlike HYSAs and MMAs, bonds are investments that might lose value.

If you sell a bond before its maturity date, depending on what’s happened to the value of the bond, you might earn a premium (value higher than your purchase price), or it might be sold at a discount (value lower than your purchase price). Plus, you might need to pay a fee to your brokerage firm for making the trade.

While bonds are often considered safer than stocks, you still run the risk they’ll lose money. Plus, unlike deposit accounts, they’re not backed by government deposit insurance. Even so, bonds can be a relatively safe way to diversify your portfolio. If you’re unsure what account is right for you, meeting with a financial planner or investment advisor is a good idea.

» MORE: What is a good investment?

Bottom line

Once you put your money in a CD, it’s important not to withdraw it early, or you might have to pay an early withdrawal penalty. With these penalties, you usually give up some of the interest you earned, which can take away the benefits of using a higher-interest-rate account in the first place.

To avoid early withdrawal penalties, choose a CD with the right term, consider CD laddering to give yourself regular access to funds, search for a no-penalty CD or opt for a different account. If you already have a CD, ask if your bank will waive the fee.