Can I Close a CD Early? What to Know About Penalties

A Certificate of Deposit (CD) is a type of savings account offered by financial institutions that holds a fixed amount of money for a specified period, providing a fixed interest rate, often higher than standard savings accounts. This structure offers a predictable return on your investment, making it a low-risk option for saving towards specific financial goals. While CDs offer stability and guaranteed interest earnings, a common question arises regarding accessing the funds before the maturity date.

Understanding Early Withdrawal Penalties

When investing in a Certificate of Deposit, you commit to keeping your funds deposited for the entire term to earn the promised interest rate. Withdrawing funds before maturity typically incurs an “early withdrawal penalty,” a fee charged by the financial institution for breaking the CD agreement.

These penalties are commonly calculated as a forfeiture of a certain number of months’ worth of interest. For instance, a common penalty for shorter-term CDs (less than one year) might be three months of simple interest, while longer-term CDs could incur a penalty of six, twelve, or even more months of interest. The specific penalty terms are outlined in the CD agreement and vary by institution, the CD’s term length, and the amount withdrawn. If the penalty amount exceeds the interest already earned, the difference may be deducted from your original principal, potentially resulting in a loss of a portion of your initial deposit.

Circumstances Where Penalties May Not Apply

While early withdrawal penalties are standard for traditional Certificates of Deposit, certain circumstances or specific CD products may allow for penalty-free withdrawals. Financial institutions often waive early withdrawal penalties in situations such as the death or qualifying disability of the CD holder. These exceptions typically require documentation to confirm the event.

Beyond these specific life events, some Certificate of Deposit products are designed with inherent flexibility. “No-penalty CDs,” also known as “liquid CDs,” allow account holders to withdraw funds before the maturity date without incurring a penalty. These flexible CDs usually require an initial grace period, often seven days after funding, before penalty-free withdrawals are permitted. While offering greater liquidity, no-penalty CDs often come with slightly lower interest rates compared to traditional CDs, reflecting the added convenience and reduced commitment.

The Process for Early CD Closure

To close a Certificate of Deposit early, the first step involves contacting your financial institution, whether it is a bank or credit union. You can usually do this by visiting a branch, calling their customer service, or sometimes through secure online messaging. During this contact, you should inquire about the specific terms of your CD agreement, especially regarding early withdrawal penalties.

The institution will then confirm the exact penalty amount based on your CD’s terms and accrued interest, helping you understand the final payout. You may need to provide identification, such as a driver’s license, and your CD account number to process the request. Once processed and any applicable penalties are deducted, funds can be disbursed. Common methods include direct deposit, transfer to an external linked account, or a physical check. The entire process can range from one to a few business days, depending on the institution’s procedures.