Can You Cash In a CD Early & What Are the Penalties?

A Certificate of Deposit (CD) functions as a specialized savings account where funds are deposited for a fixed period at a set interest rate. While CDs are designed for money to remain untouched until a specified maturity date, it is generally possible to withdraw funds early. However, accessing these funds before the CD matures typically incurs financial consequences in the form of penalties.

Understanding Early Withdrawal Penalties

Early withdrawal penalties are a standard feature for most CDs, serving as a disincentive for breaking the agreement. These penalties are usually calculated as a forfeiture of interest, rather than a direct fee on the principal. For instance, a common penalty might involve forfeiting three months of interest for CDs with terms under one year, or six to twelve months for longer-term CDs. The specific penalty amount can vary significantly among financial institutions and is detailed within the CD agreement.

If the accrued interest is less than the penalty amount, the difference may be deducted directly from the principal balance of the CD. Federal law mandates a minimum penalty of seven days’ interest if funds are withdrawn within the first six days of opening the CD. There is no federal maximum penalty, allowing institutions to set their own higher charges.

Situations Where Penalties May Be Waived

While early withdrawal penalties are common, certain circumstances might allow for a waiver. Financial institutions may waive penalties in cases of the CD owner’s death or court-determined incompetence. These exceptions are typically outlined in the CD agreement and depend on the specific policies of the bank or credit union.

Some specialized CD products, known as “no-penalty” or “liquid” CDs, allow withdrawals without penalty after an initial holding period, often seven days. These types of CDs generally provide lower interest rates compared to traditional CDs, reflecting the added liquidity they offer. Additionally, CDs held within retirement accounts, such as IRAs, may have different rules regarding penalties. While the CD itself might have an early withdrawal penalty, distributions from the retirement account before age 59½ can also incur a separate 10% tax penalty from the IRS.

Steps for Early CD Withdrawal

Initiating an early CD withdrawal involves contacting the financial institution where the CD is held. This can be done by phone or by visiting a local branch. Have your CD account number and personal identification readily available.

The institution will outline the steps, confirm any applicable penalties, and inform you of the final amount you will receive. You will typically need to provide explicit authorization, which may involve signing withdrawal forms. Funds can be disbursed through various methods, such as direct deposit to a linked account, a check, or a transfer to another account. Retain records of the transaction for your financial documentation.