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A certificate of deposit (CD) can be a valuable savings tool — if used correctly.
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It’s meant to lock up your money for a set time, giving you a fixed interest rate in return. But what happens if you need that money before the term ends?
Most banks charge a penalty if you withdraw your money early, typically a portion of either the total expected interest or the interest actually earned. Depending on when you withdraw, that fee could cancel out some (or all) of your profit.
Personally, I don’t much like the idea of having to lock up my money in the first place — especially when there are more flexible savings options out there. But I really don’t like having to pay a fee just to get my money back.
Here’s what I’ve learned about early withdrawal penalties — and what to watch out for.
How to know if cashing out early is worth it
You can lose money on a CD if you withdraw your cash too early, and you want to avoid that if at all possible. To calculate your CD profit, you’ll just need to determine:
How much interest you’ve already earned
How much interest you’ll lose to the penalty
Whether you’ll still walk away with a profit
Here’s a simple formula: interest earned – early withdrawal penalty = net gain
If that number is positive, then you’ll be in the black even after the penalty.
That said, what matters most is what you need the money for. If you’ve got some sort of emergency expense to cover, of course, go for it. Cashing out a CD early is better than taking on debt.
An early withdrawal might also make sense if a better investment opportunity has come along. But if you’re just itching to get your cash back, maybe a bit of patience will do the trick.
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Example: Is it worth it?
Let’s say you have $10,000 in a 12-month certificate of deposit with a 4.00% APY. If you pull the money out after 6 months, and the early withdrawal penalty is 3 months’ worth of interest, here’s an estimate of what you might earn:
Estimated interest earned: $10,000 × 4.00% APY ÷ 12 months × 6 months = $200
Penalty (3 months’ interest): $10,000 × 4.00% APY ÷ 12 months × 3 months = $100
Net gain: $200 earned – $100 penalty = $100
This is a dumbed-down estimate using simple interest, not factoring in how compounding interest actually works. In reality the numbers might differ slightly, but this gives you a decent idea of what to expect.
Even after the penalty, you’re up $100. But the math might not work out as well if you’ve only held the CD for a few months, or if the penalty is steeper. Always check your CD’s terms before making a decision.
Want flexibility? Consider a high-yield savings account
If you’re worried at all about needing your money early, don’t go for a CD — a high-yield savings account (HYSA) will be a much better fit.
Right now, HYSAs are offering rates competitive with CDs, sometimes 4.00% APY or higher. The difference is that they let you withdraw your funds at any time with no penalty, making them much more flexible.
You won’t get the same guaranteed return as a CD, since savings account rates can change. But you’ll have full access to your money whenever you need it, which can be worth the tradeoff. I’ve had a combo checking and savings account from SoFi® for a few months now, and love it for this very reason.
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Avoid early withdrawal fees with an HYSA today
Breaking a CD early isn’t always a bad move — but if you’re consistently paying early withdrawal fees, you’re missing out on easy profit.
If flexibility is a priority, skip the early withdrawal fees altogether: Open a high-yield savings account and earn interest without locking up your cash.
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