You can take money out of a CD early, but in almost every case the bank will charge an early withdrawal penalty equal to a set number of days or months of interest on the amount you pull out. The longer your CD’s term, the larger that penalty tends to be, and if you withdraw soon after opening the account, the penalty can be bigger than the interest you’ve earned, cutting into your original deposit.
What the Early Withdrawal Penalty Costs
When you open a CD, you agree to leave the money on deposit for a fixed term, which can run from a few months to five years or more. In exchange, the bank pays a guaranteed rate that’s usually higher than a standard savings account. Break the term, and the bank keeps a chunk of interest as its penalty.
Amounts vary by bank and term, but they follow a pattern. Based on current bank offerings:
- Terms of one year or less: 60 to 180 days of interest
- Terms of two to three years: 90 to 180 days of interest
- Terms of four to five years: 150 to 365 days of interest
Your deposit agreement lists the exact penalty for your CD. Pull it out and check before you decide anything, because the number on that page is what will actually be deducted.
Federal rules set a floor no bank can go below. If you withdraw within the first six days after funding the CD, the bank must charge at least seven days of simple interest on the amount withdrawn. If the bank permits partial withdrawals, the same seven-day minimum applies to each partial withdrawal made within six days of the last one.1eCFR. 12 CFR 204.2 – Definitions Above that floor, banks set their own numbers.
When the Penalty Eats Into Your Principal
Here’s the part that surprises people. If you haven’t held the CD long enough to earn as much interest as the penalty requires, the difference comes out of the money you deposited. Say you opened a one-year CD six weeks ago and the penalty is 180 days of interest. You’ve earned roughly six weeks of interest, but you owe six months’ worth. The bank takes the shortfall from your principal, and you walk away with less than you put in.
Can You Take Out Just Part of the Money?
Usually not. Most banks require you to close the entire CD to access any of the funds, which means paying the penalty on the full balance and then redepositing whatever you don’t need. A few institutions allow partial withdrawals, but they’re the exception. Call your bank or read your deposit agreement before assuming a partial withdrawal is on the table.
When the Penalty Can Be Waived
Federal regulations require banks to waive the early withdrawal penalty in two situations:
- Death of an account owner. The estate or beneficiaries can withdraw without penalty, and the bank will ask for a certified death certificate.
- Legal incompetency of an account owner, as determined by a court or administrative body. A guardian or conservator can access the funds penalty-free with a certified court order.
Both waivers are baked into the federal definition of a time deposit, so they apply at every bank.1eCFR. 12 CFR 204.2 – Definitions Some banks add their own hardship waivers for events like job loss or serious medical emergencies, but those are bank policies, not federal requirements. Ask.
If the CD Is Inside an IRA
A CD held in a traditional IRA, SEP IRA, or SIMPLE IRA carries an extra cost if you withdraw before age 59½. You pay the bank’s early withdrawal penalty on the CD, and the IRS adds a 10 percent additional tax on the distribution, on top of ordinary income tax on the amount withdrawn.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions For SIMPLE IRAs, that additional tax climbs to 25 percent if you withdraw within your first two years of participation.
The IRS waives its 10 percent tax in specific situations, including total and permanent disability, up to $10,000 for a first-time home purchase, qualified higher education expenses, unreimbursed medical costs exceeding 7.5 percent of your adjusted gross income, health insurance premiums while unemployed, up to $5,000 per birth or adoption, and up to $22,000 for a federally declared disaster. Even when the IRS penalty is waived, the bank’s own penalty still applies unless the CD has already matured.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Brokered CDs Work Differently
If you bought your CD through a brokerage rather than directly from a bank, you don’t pay a fixed penalty to cash out early. You sell the CD on a secondary market, similar to selling a bond, and the price depends on where interest rates have moved since you bought it.3Investor.gov. Brokered CDs: Investor Bulletin
If rates have risen, your lower-yielding CD looks worse to buyers, and you’ll likely sell at a discount and take a loss. If rates have fallen, your higher-yielding CD is more attractive, and you might sell at a profit. Your broker may also charge a transaction fee.3Investor.gov. Brokered CDs: Investor Bulletin There’s also no guarantee a buyer exists. If no secondary market is active for your CD, you may have to hold it to maturity anyway. Confirm this with your broker before you buy.
Waiting for Maturity Instead
If you can hold on, the maturity date restores penalty-free access to your money. Most banks then give a grace period of about 7 to 10 calendar days when you can withdraw your principal and interest without any charge.4Citi.com. What Happens When a Certificate of Deposit (CD) Matures?
Do nothing during that window and the bank automatically rolls your balance into a new CD of the same term at whatever rate is available then. The new CD carries a new set of early withdrawal penalties, locking the money up again. Rates may be lower than what you originally earned, so this default isn’t always in your favor. Federal rules require your bank to send a maturity notice before this happens,5eCFR. 12 CFR 1030.5 – Subsequent Disclosures but setting your own reminder a few weeks out is safer than relying on the mail.
How to Actually Request the Withdrawal
You’ll need your CD account number and a government-issued photo ID. Keep your original deposit agreement nearby so you can confirm the penalty and any restrictions.
Most banks accept requests two ways. Online, log in and follow the prompts to request a withdrawal or account closure; you may need to upload ID or provide a digital signature. In person, bring your ID to a branch and a representative will process the request and confirm what you’ll receive after the penalty and any tax withholding.
You’ll specify where the money goes: another account at the same bank, an external account (you’ll supply the routing and account numbers), or a mailed check. Processing usually takes one to a few business days. The bank sends a confirmation showing the amount released and total interest earned over the CD’s life. Keep it for your tax records.
You Can Deduct the Penalty on Your Taxes
Some good news. The early withdrawal penalty is tax-deductible as an above-the-line adjustment, so you can claim it even if you take the standard deduction. It goes on Schedule 1 of your federal return, Line 18, listed as “Penalty on early withdrawal of savings.”6Internal Revenue Service. Schedule 1 (Form 1040)
Your bank reports the penalty in Box 2 of the Form 1099-INT you’ll receive after year-end. Box 1 shows the full gross interest, not reduced by the penalty, so you report the full interest as income and separately deduct the penalty.7Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID The tax code specifically allows this deduction for forfeitures paid to a bank on premature withdrawal from a time savings account or certificate of deposit.8Office of the Law Revision Counsel. 26 USC 62 – Adjusted Gross Income Defined
No-Penalty CDs as an Alternative
If the possibility of an early withdrawal is what’s making you hesitate, look at no-penalty CDs. After an initial holding period, usually seven days, you can withdraw the full balance with no fee. The catch is a lower rate than a comparable traditional CD, and terms tend to be shorter, often under a year. Most also require you to take the whole balance rather than a partial amount. For anyone who values flexibility more than the last fraction of a percent in yield, it’s a reasonable middle ground between a locked-in CD and a plain savings account.