A certificate of deposit (CD) is a type of savings account that allows you to earn interest on a deposit over a fixed amount of time. While some CDs offer higher APYs than traditional savings accounts, they may come with an early withdrawal penalty if you want to access your funds before the end of the term.
Let’s explore how to navigate early withdrawal penalties so you can make your CD work for you.
What is an early withdrawal penalty for CDs
Financial institutions may charge a fee for early withdrawals on CDs. That means that if you want to access some or all of your money before a CD’s term ends, you may need to pay a penalty. Early withdrawal penalties may motivate account holders to exercise more discipline when it comes to saving money by discouraging premature withdrawals.
How the penalty for early CD withdrawal is determined
Different financial institutions may use different measures to determine how to penalize early withdrawals from CDs. A penalty may take the form of a portion of interest earned, a portion of the principal withdrawn or another calculation. For example, Citi generally charges a withdrawal penalty based on the amount of the principal that’s withdrawn early. If your CD term is for a year or less, you’d need to pay a penalty of 90 days of simple interest on the amount you withdraw. For CD terms longer than a year, a 180-day simple interest penalty would apply.
Before depositing your funds into a CD, you should understand what you may be charged if you withdraw from your account before the end of your term. Depending on how much and how your charge is calculated, you may prefer to put your funds in one account over another.
How to avoid a CD early withdrawal penalty
There are some instances where you may not trigger a fee for an early withdrawal from a CD. Sometimes, financial institutions may agree to waive early withdrawal penalties for extenuating circumstances on a case-by-case basis. If you feel you might qualify for one of these circumstances, you should reach out to your bank to understand your options.
Even though you typically pay a fee for early withdrawals on traditional CDs, there might be certain accounts and strategies for avoiding penalties. Let’s take a look at some of your options.
Choose a no penalty CD
If you’re worried about early withdrawal penalties, a no penalty CD might be a good option. Generally, after a set short period of time, you may make a withdrawal from a no penalty CD without paying a fee. Unlike a traditional savings account, no penalty CDs may require you to withdraw all of your funds from your account at the same time, so you still might prefer to keep your funds in your account unless you need all the money at once.
Different financial institutions may have different terms for no penalty CDs than they do for traditional CDs, so make sure you understand the difference before you choose one or the other.
Maintain a liquid emergency fund
Unlike a CD, a traditional savings account can usually be accessed fairly easily by visiting a bank branch, linking it to your checking account or transferring funds out. Before you decide to deposit all your savings into a CD, you might consider depositing some or all of your funds into a liquid emergency fund so you have more accessible savings.
How you decide to split your savings between CDs and conventional savings accounts is up to you. If you think you’ll need to access the funds you have saved up before your CD matures, you might prefer to keep all your savings in a traditional savings account. If you know that you won’t need to use a certain percentage of your savings funds before a set date, you might want to put that amount in a CD and keep another percentage more accessible.
Take advantage of the CD grace period
One way to avoid an early withdrawal penalty is to wait until your CD matures to withdraw your funds. After your CD term ends, it may renew automatically, but you typically are allowed a grace period of around a week to withdraw your funds or make changes to your account.
Some account holders may want to withdraw their funds and put them in another type of savings account, or use them to buy something special. Others may prefer to let their CD renew and keep saving in the same way. Take some time to assess your financial goals during the grace period to make the best decision for your financial future.
Use a CD laddering strategy
CD laddering refers to opening several different CDs with different, staggered terms. For instance, you might have one CD’s term end in January, and then another one end in April, and another one end in July, giving you the opportunity to withdraw funds at each maturity date. As some of your CDs mature before others, you maintain a degree of liquidity and keeping your funds more accessible than they would be if they were all in the same CD.
While you may still incur a penalty if you try to withdraw from your CDs early, you might be able to access some of your funds at different times. This strategy might work well for you if you want to keep some of your funds saved but know that there will be a point in the future where you will want to access a portion of them.
