Closing a CD early is almost always allowed, but it comes at a cost: most banks charge an early withdrawal penalty equal to a set number of months of interest on the amount you take out. Whether that trade is worth it depends on how much interest you’d forfeit, whether your situation qualifies for a waiver, and whether you’re close enough to maturity to simply wait.
How the Penalty Is Calculated
When you open a CD, you agree to leave the money on deposit for a fixed term in exchange for a guaranteed interest rate. If you break that agreement, the bank charges a penalty measured in days or months of simple interest on the amount withdrawn.
A 90-day interest penalty on a CD earning 5% annually means you forfeit roughly three months’ worth of that interest. The dollar amount scales with your rate: a 180-day penalty on a $10,000 CD earning 4.5% APY works out to about $222, while the same penalty on a CD earning 2% APY costs roughly $99.
If you close the CD before you’ve earned enough interest to cover the penalty, the bank takes the shortfall out of your principal. A $10,000 CD with a $200 penalty and only $50 in earned interest would return $9,850. You can get back less than you put in.
One more constraint worth knowing: most banks won’t let you pull out just part of the balance. Closing early usually means liquidating the whole CD, not withdrawing what you need and leaving the rest. Where partial withdrawals are allowed, the same penalty applies to the amount removed, and federal rules require at least seven days’ simple interest as a penalty on any withdrawal made within six days of the previous one.1eCFR. 12 CFR 204.2 – Definitions
Typical Penalty Amounts by CD Term
Penalties generally increase with the length of the term. Based on the schedules at major banks, common ranges look like this:
- Short-term CDs of 3 to 12 months: 60 to 90 days of interest.
- Medium-term CDs of 1 to 3 years: 90 to 180 days of interest.
- Long-term CDs of 4 to 5 years: 150 days to a full year of interest, and sometimes as much as 18 months.
Your exact penalty is set in the deposit agreement you signed when you opened the account. If you don’t have a copy, the bank can send you one, and the current rate sheet on the bank’s website usually lists the penalty schedule.
When Banks Waive the Penalty
Federal regulations identify specific situations in which a bank may release CD funds without charging the penalty. Under the footnotes to 12 CFR 204.2, a waiver is permitted when an account owner dies, and when an account owner has been declared legally incompetent by a court or other body with proper authority.1eCFR. 12 CFR 204.2 – Definitions The regulation uses “may,” not “must.” In practice, most banks do waive the penalty in these cases, and many commit to it in their deposit agreements.
If your bank fails and an acquiring institution takes over its accounts, the original deposit agreement no longer exists. During that transition, you can withdraw your CD funds without an early withdrawal penalty.2FDIC.gov. Is Your Bank Branch Relocating or Closing? If no bank steps in, the FDIC pays out insured deposits directly.
Some banks also waive penalties for severe financial hardship, but this is discretionary. There’s no federal requirement to grant a hardship waiver, so the outcome depends on the institution and the circumstances. Calling the bank and asking costs nothing.
IRA CDs: Two Penalties, Not One
A CD held inside a traditional or Roth IRA carries two separate penalties if you close it early and pull the money out of the account. The bank charges its standard early withdrawal penalty. On top of that, if you’re younger than 59½ and actually take a distribution from the IRA, the IRS imposes an additional 10% tax on the taxable portion.3Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs For a traditional IRA, the withdrawal itself is generally taxable as ordinary income as well.
Several exceptions can eliminate the 10% IRS penalty, including total and permanent disability, up to $10,000 for a first-time home purchase, qualified higher education expenses, unreimbursed medical expenses above 7.5% of your adjusted gross income, substantially equal periodic payments, and up to $5,000 per child for birth or adoption expenses. The IRS publishes the full list.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
There’s a useful distinction here. Rolling the proceeds into a different investment inside the same IRA, such as a money market fund or another CD, isn’t a distribution, so the 10% IRS tax doesn’t apply. You’d still owe the bank’s early withdrawal penalty on the original CD, but the retirement account stays intact.
Brokered CDs Work Differently
If you bought your CD through a brokerage account instead of directly from a bank, the mechanics change. You don’t request an early withdrawal and pay a penalty. You sell the CD on the secondary market to another investor.5Vanguard. Certificates of Deposit: Rates and CD Investment Options
The price depends on where interest rates have moved since you bought it. If rates have risen, your fixed-rate CD is less attractive to buyers, and you may sell it for less than you paid, taking a loss of principal. If rates have fallen, your CD could sell for more than its face value. The outcome is less predictable than a bank penalty but can cut either way.
You Can Deduct the Penalty on Your Taxes
The early withdrawal penalty on a bank CD is deductible, and the deduction is available even if you don’t itemize. Your bank reports the full interest earned in Box 1 of Form 1099-INT and the penalty separately in Box 2.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID You pay tax on the full interest, then deduct the penalty on Schedule 1 (Form 1040), line 18.7Internal Revenue Service. Publication 550, Investment Income and Expenses
Because it’s an above-the-line deduction, it reduces your adjusted gross income directly. A $300 penalty at a 22% tax bracket saves roughly $66 in federal taxes. That doesn’t erase the penalty, but it lowers the real cost. Keep the 1099-INT with your tax records.
Check the Maturity Grace Period First
Before you accept the penalty, check where you are in the CD’s life. Most CDs auto-renew at maturity, and banks are required to notify you at least 30 calendar days before maturity for any auto-renewing CD with a term longer than one month. A bank can instead send notice at least 20 days before the end of a grace period, as long as the grace period lasts at least five days.8eCFR. 12 CFR 1030.5 – Subsequent Disclosures
The grace period is the window right after maturity during which you can withdraw the funds or move them without any penalty. It’s typically 7 to 10 days, though some short-term CDs offer as little as one day. If your maturity date is a few weeks away, waiting almost always beats paying the penalty. Miss the grace period and the money rolls into a new term at the current rate, restarting the whole cycle.
How to Actually Close the CD
You can request early closure through your bank’s online portal, by phone, or in a branch. You’ll need to say where the remaining funds should go after the penalty comes out, usually a linked checking or savings account at the same bank. Without a linked account, the bank may mail a cashier’s check, which adds several business days.
Expect to verify your identity before the request goes through. In person, that means a government-issued photo ID.9eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks Online and by phone, the bank uses security questions, account credentials, or similar authentication. Once verified, the funds are generally available within one to three business days.
Before finalizing, do the math on what you’re giving up. Compare the penalty amount, minus the tax deduction, against the interest you’d earn by holding the CD to maturity. When the money is going toward high-interest debt or an emergency, closing early often makes sense. When the alternative is a short-term personal loan or a balance transfer at a reasonable rate, the loan may cost less than the forfeited interest. Run both numbers before you sign the closure request.