Cashing out a certificate of deposit before its maturity date triggers an early-withdrawal penalty, almost always charged as a set number of months of interest. In the first months of a CD it can even eat into your principal.
A CD trades access for a higher, guaranteed rate: you agree to leave the money untouched for the term, and the bank pays you more than a savings account would. Break that agreement early and the bank claws back part of the interest. To see what an early withdrawal would actually leave you with, use the free CD early withdrawal penalty calculator.
How the penalty is calculated
The penalty is simple interest on the amount you take out, at the rate on the CD, for the number of months the bank specifies:
Penalty = deposit x rate x (penalty months / 12)A 6-month penalty on a $10,000 CD paying 5% is 10,000 x 0.05 x 0.5, or $250. The penalty is based on the stated rate and the deposit, not on how much interest you have actually earned, which is why the timing of an early withdrawal matters so much.
Typical penalty sizes by term
Penalties scale with the length of the CD. These are common ranges, but the exact figure is set by your bank and spelled out in the account disclosure:
| CD term | Typical penalty |
|---|---|
| Under 1 year | About 3 months of interest |
| 1 to 3 years | About 6 months of interest |
| 4 to 5 years | About 9 to 12 months of interest |
When the penalty eats your principal
Because the penalty is figured on your deposit rather than your earnings, breaking a CD very early can leave you with less than you put in. Take a $10,000 CD at 4% with a 3-month penalty. Withdraw after one month and you have earned only about $33 in interest, but the penalty is $100. The bank takes the $67 difference out of your principal, so you walk away with about $9,933.
Federal rules allow banks to dip into principal to cover the penalty, so this is normal rather than a mistake. The longer you have held the CD, the more interest you have banked to absorb the hit.
A worked example
Say you put $10,000 into a 5-year CD at 5% and need the money after 12 months, with a 6-month penalty. You have earned about $512 in interest. The $250 penalty leaves roughly $262 in net interest, so you receive about $10,262 — an effective yield near 2.6% for the year instead of 5%. You still came out ahead, just by less. Run your own figures in the penalty calculator.
When breaking a CD early is still worth it
- Rates have risen sharply and a new CD pays enough more to beat the penalty over the remaining term.
- You face an emergency and the alternative is high-interest debt such as a credit card.
- You are moving the cash toward a higher-return goal and the penalty is small next to the gain.
One bright spot: the early-withdrawal penalty is tax deductible. It is reported in box 2 of your Form 1099-INT and subtracted from income on Schedule 1 of your federal return, even if you do not itemize.
How to avoid the penalty
- Match the term to your timeline so you are not tempted to break the CD early.
- Consider a no-penalty CD, which lets you withdraw once after a short waiting period, usually at a slightly lower rate.
- Build a CD ladder so a portion matures every year and cash is available without breaking anything. The CD ladder calculator shows how.
- Keep an emergency fund in a liquid high-yield savings account so a surprise expense never forces an early withdrawal.
Before you lock in, compare the real return of different terms with the CD calculator so you choose a length you can comfortably keep.