When Is Early CD Withdrawal a Good Idea?

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A certificate of deposit (CD) can be a great place to store your short-term savings. These accounts often have higher annual percentage yields (APYs) than standard savings accounts, though they might be lower than or on par with the best high-yield savings accounts. With a CD, though, you can’t access your funds for a set time—if you withdraw before the maturity date, you’ll pay a penalty, and those fees could offset or negate your earnings.

But if rates rise due to inflation and higher rates become available elsewhere, it might make sense to break your current CD and start from scratch. Here are three questions to ask before you decide.

Recommended High-Yield Savings Accounts

Bank Account	APY	Features	Learn More
UFB Direct Secure Savings Account Open Account	5.25% More Info UFB Direct breaks balances into five tiers, but, currently, there is only one interest rate.	No minimum deposit No monthly fee	Open Account
SoFi Checking and Savings Open Account	0.50% - 4.60% More Info Customers earn 4.60% APY on savings balances when they set up recurring monthly direct deposit of their paycheck or benefits provider via ACH deposit. Alternatively, deposit at least $5,000 each month to earn 4.60% APY on your savings balance. Checking balances earn 0.50% APY	No minimum deposit No monthly fee	Open Account
CIT Bank Platinum Savings Account Open Account	5.05% More Info Earn 5.05% APY on balances over $5,000. Balances of less than $5,000 earn 0.25% APY. Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Platinum Savings account are variable and subject to change at any time without notice.	$100 minimum deposit No monthly fee	Open Account
CIT Bank Savings Connect Account Open Account	4.65% More Info Annual Percentage Yield is accurate as of July 27, 2023. Interest rates for the Savings Connect account are variable and subject to change at any time without notice.	$100 minimum deposit No monthly fee	Open Account

1. What Will the Early Penalty Cost?

With most certificates of deposit, making a withdrawal before your CD matures results in a penalty. (No-penalty CDs are the exception to this rule.) The cost of the early withdrawal penalty a bank charges, however, can vary based on several factors.Early withdrawal penalties are not the same at every bank. These charges may also differ between types of CDs at the same bank. For example, a CD with a term of a year might charge less interest than a CD with a three-year term.

Below is an overview of CD early withdrawal penalties at a variety of popular banks.

2. Could I Earn More Interest by Reinvesting My Savings in a New CD?

If interest rates have gone up since you took out your certificate of deposit, it might be possible to earn more money by breaking your CD and reinvesting in a new account with a higher APY. Yet a higher APY doesn’t automatically mean that breaking your CD is the right move when an early withdrawal penalty is involved. You’ll need to do some calculations to figure out which financial move makes the most sense for your situation.

Here’s how to calculate whether you might earn more by making an early CD withdrawal and reinvesting your savings in a new CD with a higher APY:

1. Calculate the amount of interest your CD earns each day or month. 
2. Multiply the interest by the number of days (or months) of interest you would lose if you made an early withdrawal.
3. Calculate the amount of interest you could potentially earn from the new CD, but only for the duration of the old CD’s term. 
4. Compare the potential earnings from the new CD (for the duration of the old CD’s term) to the penalty.

If the penalty is less than the potential profits, it might make sense to break your CD early. But if your calculations result in a loss, it’s probably better to leave your cash in the existing CD until its maturity date. Then you can consider investing in a higher-rate CD or a high-yield savings account or money market account at a future date.

Recommended CD Accounts

Account	1-Year APY	3-Year APY	5-Year APY	Learn More
CIT Bank Term Certificates of Deposit Open CD	0.30% More Info Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice	0.40% More Info Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice	0.50% More Info Annual Percentage Yield is accurate as of April 2, 2024. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice	Open CD
Capital One 360 Certificates of Deposit Open CD	4.80%	4.00%	3.90%	Open CD
Marcus by Goldman Sachs High-Yield Certificates of Deposit Open CD	4.90%	4.15%	4.00%	Open CD
Discover Certificates of Deposit Open CD	4.70%	3.75%	3.75%	Open CD
Quontic Bank Certificates of Deposit Learn More	4.50%	4.40%	4.30%	Learn More

3. Do I Need to Access My Savings for Another Reason?

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You might need to access the cash in your CD early for an emergency or other unplanned need. Many financial experts recommend setting aside at least six months' worth of expenses to protect yourself in case of a job loss, illness or other financial catastrophes.

In general, it’s best to avoid keeping your full emergency fund in a CD. This type of account doesn’t offer you the same flexibility as other deposit accounts. But if you have stored all of your emergency money in a CD or if you’ve already exhausted your other savings, you might find yourself in a position where an early CD withdrawal is necessary.

It can be upsetting to face an early withdrawal penalty and lose a portion of the interest you worked hard to earn, but having those savings could help you out of a crisis, which is sometimes the most important thing. Once your financial situation improves, you can work to rebuild your emergency fund for the future.

Bottom Line

When you open a CD from an FDIC insured bank and remain within federal deposit limits, your savings is protected from loss. Making an early withdrawal is one of the only ways you might lose money with this type of low-risk investment. 

Nonetheless, there are a few situations where an early CD withdrawal could make sense. Just be sure to take your time, crunch the numbers and examine your situation from all angles before you make a decision that you can’t reverse.

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