CD Early Withdrawal Penalties: Tips for Maximizing Your Retirement Accounts

A certificate of deposit (CD) helps your retirement savings maintain buying power with little to no risk. You deposit a set amount for a fixed term and for a fixed interest rate from a bank or credit union. Terms can be short (three months to a year) or longer (18 months, two years, three years or five years) or longer.

When your CD’s term ends, it reaches its maturity. That’s when you get the return of your principal along with the interest you’ve earned. Because CDs offer guaranteed returns, they’re a popular savings tool for people planning to retire or for someone looking to diversify a future retirement portfolio.

CDs offer higher interest rates than cash accounts like money market accounts and savings accounts because you agree to leave your money in the issuer’s hands for a specified term. If you break the original agreement and need to get access to your money before your CD matures, you’ll likely face an early withdrawal penalty.

If you tap into your CD’s funds before it reaches maturity, you’re likely to face an early withdrawal penalty. Typically, the early withdrawal penalty will give a certain amount of your interest back to the issuer.

Banks are required by law to excise an early withdrawal penalty if funds from a CD get withdrawn by an owner before it matures, according to the Office of the Comptroller of the Currency. While federal law sets a minimum penalty for early withdrawal from CDs — seven days of simple interest if you make a withdrawal within six days of opening the CD — there is no maximum penalty.

The early withdrawal penalty sometimes reduces the principal of the investment, according to Discover Bank. Confirm whether your principal or interest will be penalized before opening a CD and verify if the penalty will affect the total balance of your CD or just the amount you’re withdrawing. Generally, the longer your CD’s term is, the higher the penalty for interest will be.

“There is no average amount for the early withdrawal penalty. Penalties are based on the term of the CD and the banks that issue them,” co-founder of Planable Wealth Cameron Valadez, CFP®, CPFA, AWMA®, told RetireGuide. “They usually describe it in terms of ‘x number of days of interest.’ For example, 60 days of interest for an early withdrawal penalty.”

With Ally Bank, for example, you’ll get penalized 150 days of interest if you withdraw from your five-year CD early. You’d only be penalized 60 days of interest with a one-year CD. Below is a table comparing popular banks’ early withdrawal penalties for CDs.

Because the goal of a CD is a fixed guaranteed return, an early withdrawal penalty can erase the main purpose of using a CD to increase your retirement funds. Once you know the exact penalty from your issuer, you can use a simple calculation to determine how much you’d lose if you had to tap into your funds too soon.

There are four primary exceptions to early withdrawal penalties for CDs. If the CD owner passes away or gets declared legally incompetent by a court or other body of competent jurisdiction, the issuer won’t attach a penalty.

The second exception to avoiding an early withdrawal penalty is purchasing a liquid CD. Also known as a no-penalty CD, a liquid CD lets you use your money at any point during the CD’s term without penalty. Because liquid CDs provide less risk, they offer lower interest rates compared to traditional CDs.

You can also request a CD penalty waiver from your issuer, according to the Office of the Comptroller of the Currency. You must explain why you need to make the withdrawal and must have your issuer find your reasoning sound to get the penalty waived.

Some CDs also come with exceptions. For example, Alliant Credit Union’s IRA CD has a no-penalty clause if you become disabled or after you reach age 72.

Consider your options before you withdraw any money early from your CD. Ask if there are other alternative savings vehicles without penalties you could pull from first. How much of a financial hit will your retirement savings take if you tap into your CD early?

You can talk with a financial advisor to determine your next best move. Read your CD’s fine print to make an informed decision.

You could also find yourself in less of a risky situation if you laddered your CDs. CD laddering is a tactic of buying multiple CDs with different maturity dates at the same time. You could do this by purchasing a three-month CD, a six-month CD, a one-year CD and a three-year CD. Your CDs will mature regularly. When they do, you can decide to use the cash with no penalty attached or buy another CD for a specific term.

With laddered CDs, it’s reasonable to hold off withdrawing early since you have faster access to your money. If you had a single five-year CD, you could be in a bind if you need your money soon before the five-year mark. Consider your long-term retirement goals before withdrawing from your CD early to avoid unnecessary penalties.

Consulting with a financial advisor can be a key element of a sound retirement plan. Everyone has different needs and incomes to account for. A financial advisor can help you personalize your retirement plan and read the fine print of your CD’s early withdrawal penalty.

CD early withdrawal penalties are complex and easy to dismiss when planning for retirement. You may think there’s no way to get your money before the term ends. But in times of high inflation and post-pandemic stress, there may be unavoidable and unexpected financial stressors.

You should research your issuer’s early withdrawal penalty before opening a CD. Determine if your investment portfolio could take the financial hit if you end up needing to access your money early. You should also have a backup plan prepared to reinvest funds to make up for any lost interest or principal.