What Is the Penalty for CD Early Withdrawal?
Uncover the financial implications and practical steps of early CD withdrawal. Know the costs before accessing your locked funds.
A Certificate of Deposit (CD) is a savings product where funds are held for a fixed period at a fixed interest rate. This arrangement typically offers higher interest rates than standard savings accounts because the money is committed for a specific term. Withdrawing funds from a CD before its maturity date usually incurs a cost, known as an early withdrawal penalty.
Understanding Early Withdrawal Penalties
An early withdrawal penalty for a CD is a fee imposed by a financial institution when funds are removed before the agreed-upon maturity date. This penalty acts as a deterrent, compensating the institution for the broken commitment to keep funds locked away. The specific structure of these penalties varies among institutions and CD products.
Most often, the penalty is calculated as a forfeiture of a certain number of months’ worth of interest. For example, a CD with a term of less than one year might incur a penalty of 90 days of interest, while a longer-term CD, such as a five-year term, could result in a penalty of 12 months’ interest or more. If the interest accrued on the CD is not sufficient to cover the penalty, the difference may be deducted directly from the principal amount initially deposited. This means a depositor could potentially receive less money back than they originally invested.
Calculating Your Early Withdrawal Penalty
To estimate the financial impact of an early CD withdrawal, identify the CD’s original interest rate, principal balance, and the specific penalty terms outlined in the CD agreement. For example, consider a $10,000 CD with a 2% annual interest rate and a penalty of 12 months’ interest. If you withdraw early, your annual interest earned would be $200 ($10,000 x 2%). The penalty of 12 months’ interest would also be $200.
If you had only earned $100 in interest before withdrawing, the remaining $100 of the penalty would be deducted from your principal. Some institutions may calculate the penalty based on the interest rate divided by 365 days, multiplied by the number of penalty days and the original principal or the amount withdrawn.
Common Exceptions to Early Withdrawal Penalties
Certain circumstances may allow for the waiver of early withdrawal penalties, though these are outlined in the CD agreement and depend on the financial institution’s policy. One common exception is the death or legal incapacitation of the CD holder. In such cases, financial institutions may agree to waive the penalty to allow access to the funds.
Another exception applies to certain qualified retirement accounts, such as an IRA CD, once the holder reaches age 59½. Specific CD products, known as “no-penalty CDs” or “liquid CDs,” are designed to allow penalty-free withdrawals after a short initial holding period, often seven days from funding. These flexible CDs typically offer lower interest rates compared to traditional CDs, reflecting the added liquidity.
The Early Withdrawal Process
Initiating an early withdrawal from a Certificate of Deposit involves procedural steps with your financial institution. First, contact your bank or credit union directly, by phone, online, or by visiting a branch. You will need to identify the specific CD account from which you wish to withdraw funds. The institution will then guide you through any required documentation or forms necessary to process the early withdrawal. After the request is made, the financial institution will process the withdrawal, disburse the funds, and provide confirmation of the transaction.