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How To Avoid CD Withdrawal Penalties

A certificate of deposit (CD) is a savings tool that allows you to deposit money for a set period, often with a fixed interest rate. In exchange for holding your money for a fixed length of time, banks often reward you with a higher interest rate than a regular savings account.

However, withdrawing money from a CD before the agreed time usually results in a penalty. Here, explore what CD withdrawal penalties are and how much they cost. Then, learn why you might need to withdraw early and the best ways to avoid penalties.

What Is a CD Withdrawal Penalty?

A CD withdrawal penalty or “early withdrawal penalty” is a fee charged when you take money out of your CD before the maturity date. The maturity date is the day your CD term ends. At the maturity date, a bank typically lets you access your funds without penalty.

When you withdraw early, the bank or credit union may charge a fee for doing so, because you agreed to leave your money in the account for a set period of time. Withdrawing early breaks that promise. Banks can set their own terms for these penalties, so the amount can vary depending on where you opened your CD.

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How Much Does a CD Withdrawal Penalty Cost?

The penalty amount depends on several factors, including the length of the CD and the bank’s rules.

Common penalties include:

Interest penalties.
Flat fees.
Loss of principal.

Many banks charge a fee equal to a certain number of months' worth of interest when you withdraw early. For example, if you have a one-year CD, the bank might charge you three months' worth of interest as a penalty for early withdrawal.

Some banks charge a specific amount to withdraw ahead of schedule, regardless of how much you’ve earned in interest. For example, you may pay $50 or $100 to take your money out early.

In some cases, a penalty can cost you more than the interest you've earned, which could reduce your initial deposit (principal). This can happen if the withdrawal is made early in the term and the penalty exceeds your earnings, or if the penalty amount is high.

Reasons You Might Need To Withdraw From a CD Early

While it's often best to keep your money in a CD until it matures, there are situations where you might need to withdraw early. Here are some common reasons this might happen.

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Unexpected Expenses

Sometimes, emergencies arise, like medical bills, car repairs, or home repairs. These situations may require quick access to your money, even if it means paying a penalty.

Higher Interest Rates

If interest rates increase, you might want to move your money to a new CD with a better rate. This is especially tempting if your current CD has a low rate compared to what’s available in the market.

Unforeseen Debt Repayment

If you have high-interest debt, it might make sense to use your CD funds to pay it off, even if it means facing a penalty. The money saved in interest could be worth more than the penalty you’d pay.

Sudden Life Changes

Major life events like a job loss, divorce, or needing to relocate might require you to access your savings sooner than planned. These events could make it difficult to wait for your CD to mature.

4 Ways To Avoid CD Withdrawal Penalties

Even though you may need to withdraw your CD funds early sometimes, it’s better to avoid penalties if possible. Here are some ways you can keep your money safe from unnecessary fees.

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1. Choose the Right CD Term for Your Needs

One way to avoid penalties is by choosing a CD with a term that fits your financial situation. If you think you might need access to your money soon, don’t lock it up in a long-term CD. Instead, choose a short-term CD or a more flexible savings option.

If you don’t need the money for a few years, a long-term CD might be a good choice. But if you think you might need to access it sooner, a shorter-term CD could be a better fit.

2. Use a CD Bundle

A CD bundle is a simple way to spread your savings across multiple CDs with different maturity dates. Instead of choosing individual CDs on your own, with Centier you can open a CD Bundle for as little as $1,000 per CD. With our CD Bundle, you open three CDs at once a 3-month, 6-month, and 12-month term. This structured approach allows you to:

Access part of your savings at regular intervals as each CD matures.
Avoid early withdrawal penalties by having funds available at regular intervals throughout the year. Earn steady returns while keeping your money working for you.

With the CD Bundle, you don’t have to guess which CD terms to choose. It’s an easy first step into CD savings, giving you flexibility while growing your money over time.

3. Take Advantage of the Grace Period

When your CD reaches maturity, many banks offer a grace period of 7 to 10 days after the maturity date to make changes to your account, make additions, or withdraw your funds. During this time, you can take out your money without penalty.

If you know when your CD matures and keep track of the grace period, you may have the opportunity to access your funds penalty-free. If you don’t take action during the grace period, the bank may automatically renew your CD for another term.

4. Ask About Waivers for Special Circumstances

In some cases, banks may waive the penalty for early withdrawals in specific situations. For example, if you are facing a financial hardship, such as a serious illness, your bank might allow you to withdraw funds early without charging you a penalty.

Always ask your bank or credit union about exceptions or hardship provisions. They may have programs in place to help people who are going through difficult situations.

Frequently Asked Questions

How do I withdraw a CD without penalty?

To withdraw a certificate of deposit (CD) without a penalty, you can:

Wait for it to mature and then withdraw your funds during the grace period.
Try asking for the penalty to be waived if you have a special circumstance, but the waiver may be declined.

Can CD penalties be waived?

Yes, some banks may waive penalties for specific reasons like death, incompetence of an owner, financial hardship, or
emergencies, where the law permits. Contact your bank to discuss your situation and explore options.

Is it worth it to withdraw a CD early?

It depends. If the penalty is smaller than the benefit of accessing the funds, like paying off high-interest debt or taking advantage of a better rate, it might be worth it. Always calculate the costs and benefits first.

Plan Ahead and Protect Your Savings with Centier

While CD withdrawal penalties can be frustrating, careful planning can help you avoid them. By choosing the right CD term, and using strategies like CD ladders, you can protect your money from fees.

Ready to start saving with ease? To take the guesswork out of CD savings, open a Centier CD Bundle today.