It’s not hard to earn interest on a certificate of deposit, known as a CD for short. You simply leave your money in the CD for a specific amount of time and the bank pays the promised interest rate. You can, however, lose the interest you’ve earned – and even some of the principle you deposited – if you withdraw your money from the CD too early.
How Early Withdrawal Penalties Are Charged
You’ll be charged an early withdrawal penalty if you withdraw your money from the CD before it matures. For example, if you purchased a 60-month CD and withdraw your money after 48 months, you’ll have to pay a penalty because you didn’t leave your money there for the entire 60 months.
You can be charged an early withdrawal fee even after the CD has matured if you don’t withdraw the money before it’s reinvested. When a CD matures, you have a certain period of time, e.g. 15 days, to withdraw the money or reinvest the CD. Many CDs will automatically renew if you don’t respond. If your CD renews and you need the money, you’ll have to pay the early withdrawal penalty.
How Much is the Early Withdrawal Penalty
CD early withdrawal penalties vary from bank to bank and even by each CD product. Early withdrawal penalties require you to forfeit a certain amount of interest and may even charge a fee on top of the interest forfeited. For example, a 12-month CD may have an early withdrawal penalty of 3 months interest. Or, it could also charge $10 plus 3 months interest. Longer-term CD products often have higher early withdrawal fees. You might forfeit only a percentage of the interest you’ve earned.
If you withdraw your money from a CD too early, you might end up earning absolutely nothing on the deposit. Or worse, you might lose some of the principle you deposited. For example, let’s say you deposit $1,000 in a 13-month CD at 3% APY and a 6-months-interest early withdrawal penalty. If you withdraw your money at eight months, you would only earn six months of interest. If you withdraw your money at four months, you would not only forfeit all the interest you earned, but the other two months of interest would be taken from your original deposit.
Can You Avoid the Penalty?
There are CDs that don’t have early withdrawal penalties, but these CDs have lower interest rates. In fact, the interest rate on a no-penalty CD may be closer to that of a savings account offered by the same bank.