When is Early CD Withdrawal A Good Idea?

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A certificate of deposit (better known as a CD) can make a great place to store your short-term and medium-term savings. In general, these accounts feature higher annual percentage yields (APYs) than standard savings accounts. CDs often offer higher APYs than other deposit accounts like high-yield savings accounts (HYSAs) and money market accounts as well.

Yet, in exchange for a potentially higher interest rate, you’ll have to make a compromise. With a CD, you must agree to lock your funds in an account for a set period of time. If you change your mind and decide to withdraw your cash before the maturity date on your account, you’ll pay a penalty.

In many cases, it doesn’t make sense to open a CD unless you’re going to leave the funds in the account for the full term. Making an early withdrawal and triggering a penalty could offset and sometimes negate your earnings on the account. But if interest rates rise due to inflation and higher CD rates become available elsewhere, it might make sense to break your current CD and start from scratch.

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In some situations, an early CD withdrawal could be the right move. Here are three questions to ask before you make your final decision.

1. What will the early withdrawal penalty cost?

With most certificates of deposit, making a withdrawal before your CD matures will result 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.

First, early withdrawal penalties are not the same from one bank to another. These charges may also differ between different types of CDs at the same bank. For example, CIT Bank charges three months of simple interest for terms of up to one year, six months of simple interest for terms of one to three years, and 12 months of simple interest for terms greater than three years.

CIT Bank Term Certificates of Deposit

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Member FDIC

• Our Rating 3.5/5 How our ratings work Read the review
• Minimum
  Deposit Required$1,000
• 1 Year APY0.30% More Info

  Annual Percentage Yield is accurate as of January 24, 2023. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

• 3 Year APY0.40% More Info

  Annual Percentage Yield is accurate as of January 24, 2023. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

• 13-Month APY4.65% More Info

  Annual Percentage Yield is accurate as of January 24, 2023. Interest rates for CIT Bank's term CDs are variable and subject to change at any time without notice

Many banks that offer CDs require customers to commit to lengthy terms of several years or more in order to earn the highest interest rates available. However, with CIT Bank's term CDs, the opposite is true. To get the best rates at CIT, you'll need to open one of its shorter-term CDs, such as its 13-month CD that pays 4.65% APY. If you want an easy way to save more money without having to wait years, CIT Bank's term CDs are a solid option.

• Overview
• Pros & Cons

Overview

If you’re looking for a dependable way to earn interest on your money in the short term, CIT Bank’s certificates of deposits may be an excellent choice for you. However, those looking to open a long-term CD may be better off looking elsewhere.

Pros

• Strong rates for 13- and 18-month terms
• FDIC insured

Cons

• Rates for longer terms unimpressive

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 the funds in a new account that offers 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.

• Step One: Calculate the amount of interest your CD earns each day or month. 
• Step Two: Multiply the interest your CD earns by the number of days (or months) of interest you would lose if you made an early withdrawal from your account.
• Step Three: Calculate the amount of interest you could potentially earn from the new CD, but only for the duration of the old CD’s term. 
• Step Four: 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 in the scenario above, it might make sense to break your CD early. But if your calculations result in a loss, then it’s probably better to leave your cash in the existing CD until its maturity date and consider reinvesting in a higher-rate CD or some other type of account, like a high-yield savings account or money market account, at a future date.

Recommended Savings Accounts

UFB Direct Preferred Savings Account

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at UFB

• Our Rating 5/5 How our ratings work Read the review
• APY5.02% More Info

  UFB Direct breaks balances into five tiers, but, currently, there is only one interest rate.

• Minimum
  Deposit RequiredN/A
• Intro Bonus N/A

The UFB Preferred Savings Account has one of the highest interest rates we’ve seen for a high-yield savings account at up to 5.02% APY. Plus, there are no monthly fees and no minimum balance to open.

• Overview
• Pros & Cons

Overview

With one of the strongest high-yield savings interest rates on the market, as well as no monthly fees or minimum opening deposit, UFB Direct’s Preferred Savings Account is an extremely attractive package.

Pros

• Strong interest rate
• No maintenance fees or minimum monthly balances
• Free complimentary ATM card
• Mobile app and SMS banking

Cons

• No signup bonus
• No associated checking account

CIT Bank Savings Connect Account

Open Account

Member FDIC.

• Our Rating 4.5/5 How our ratings work Read the review
• APY4.20% More Info

  Annual Percentage Yield is accurate as of March 15, 2023. Interest rates for the Savings Connect account are variable and subject to change at any time without notice.

• Minimum
  Deposit Required$100
• Intro Bonus N/A

CIT Bank's Savings Connect account is one of our top picks for high-yield savings accounts. Featuring a competitive flat APY on all balances, it can go head-to-head with most of the top savings accounts available. What's more, you don't have to do anything special to earn this high interest rate; many similar accounts (including some offered by CIT) only offer their highest interest rates to customers who complete certain requirements.

• Overview
• Pros & Cons

Overview

With extremely competitive interest rates and a host of convenient features, the CIT Bank Savings Connect account can go head-to-head with nearly any other savings account in the U.S.

Pros

• Competitive APY
• No monthly service fee
• Free electronic bank transfers to checking accounts (even if it isn't a CIT checking account)

Cons

• No fee-free ATM network
• Minimum opening deposit required

3. Do you need to access your savings for another reason?

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There’s another reason you might want to access the cash you have stored in a CD early — 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 certificate of deposit. This type of account doesn’t offer you the same flexibility as other deposit accounts. But if you made the mistake of storing 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.

In such situations, it can be upsetting to face an early withdrawal penalty and lose a portion of the interest that you worked hard to earn. Yet try to keep in mind that you’re still in a fortunate position.

According to the Consumer Financial Protection Bureau (CFPB), almost 25% of consumers have set no money aside for savings. So, even if you lose money through an early withdrawal penalty, you should still feel good about the fact that you followed smart savings practices and have a financial cushion to rely on in your time of need. 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.