You can almost always cancel a CD early, but the bank will charge an early withdrawal penalty equal to a set number of days or months of interest. Federal law sets a floor of seven days’ simple interest and no ceiling, so the real cost depends on your bank’s schedule and how much time is left on the term. Break the CD early enough in a long term, and the penalty can reach past your interest and into your original deposit.1
How the Penalty Is Calculated
Banks quote the penalty as a flat number of days or months of simple interest on the amount withdrawn. To estimate what you’d owe, divide the CD’s annual interest rate by 365 to get a daily rate, then multiply by your balance and the number of penalty days. A $10,000 CD at 4% APY with a 90-day penalty costs roughly $98.63 to close early.
The number of penalty days scales with the CD’s term. Short-term CDs of a year or less commonly charge 60 to 90 days of interest. Three-to-five-year CDs often jump to 150 to 180 days. Some banks charge a full year of interest on their longest terms. These are industry norms, not rules. The only federal requirement is that first-week withdrawals cost at least seven days of simple interest; above that, banks set their own schedules.
When the Penalty Eats Into Your Principal
Because there is no federal cap, the penalty can be larger than the interest you’ve earned so far. When that happens, the bank takes the shortfall out of your deposit, and you walk away with less than you put in. The risk is highest on long-term CDs closed within the first few months, before enough interest has accrued to absorb the charge.
When It’s Worth Paying the Penalty
The math is straightforward. Figure out what the penalty would be, then estimate how much more you’d earn by moving the money into a new CD at today’s rate for the rest of the original term. If the extra interest beats the penalty, you come out ahead.
Say the penalty is $50 and a new CD would earn $150 more over the same remaining months. You gain $100 by switching. The closer you are to the original maturity date, the less time a higher rate has to work, so the calculation gets worse. A rough check: if you’re past the halfway point of the term, the penalty usually isn’t worth paying unless rates have moved by more than a full percentage point.
Situations Where the Penalty Can Be Waived
Federal reserve requirements let banks skip the penalty entirely in a short list of situations:
- Death of any account owner. The bank will ask for a certified death certificate.
- A court determination that an account owner is legally incompetent.
- Withdrawal within ten days after maturity on an auto-renewing CD.
- Loss of FDIC coverage after a merger of two federally insured banks. If the merger pushes your combined time deposits over the FDIC limit, the affected portion can be withdrawn penalty-free for up to one year.
Individual banks sometimes offer additional waivers by contract, such as for court-ordered asset liquidations, but those aren’t required by federal rule. Ask your bank directly if your situation is unusual.
The Grace Period at Maturity
The most avoidable version of an early withdrawal penalty is the one you pay because you missed the maturity date. Most CDs auto-renew into a new term at whatever rate the bank is offering that day. Once the grace period closes, you’re locked into another term with its own penalty schedule.
Federal rules require banks to notify you before an auto-renewing CD with an original term longer than one month matures. The notice tells you the maturity date and, for longer-term CDs, the new rate and APY or a number to call if those haven’t been set. Mark the maturity date on a calendar. If you want the money out, act inside the grace period.
CDs Inside an IRA
If your CD sits inside a traditional IRA and you’re under age 59½, breaking it early triggers two penalties, not one. The bank charges its standard early withdrawal penalty on the CD. The IRS then imposes a 10% additional tax on the distribution because it counts as an early withdrawal from a retirement account. That 10% is on top of ordinary income tax on the distributed amount.
The IRS waives its 10% additional tax in limited situations, including total and permanent disability and certain other qualifying events. The bank’s penalty is a separate contractual matter and applies regardless of the reason. Check both lists before you pull the money.
The Penalty Is Tax-Deductible
The penalty your bank charges is deductible on your federal return, and most people miss it. Your bank reports the amount on Form 1099-INT in Box 2, labeled “Early Withdrawal Penalty.” You claim it on Schedule 1, Line 18 of Form 1040. It’s an above-the-line deduction, so you get it whether or not you itemize.
One quirk trips people up. The interest in Box 1 is not reduced by the penalty in Box 2. You report the full interest as income and take the penalty separately as the deduction. The net result is correct, but the two entries have to travel on different lines.
Alternatives if You Might Need Early Access
A no-penalty CD lets you withdraw the full balance without a fee after the six-day holding period required by federal regulation. The rate is lower in exchange, generally around 0.3 to 0.5 percentage points below a traditional CD of the same length. Most no-penalty CDs also require you to withdraw the entire balance at once rather than take a partial withdrawal.
Brokered CDs, bought through an investment brokerage rather than a bank, don’t use an early withdrawal penalty at all. Instead, you sell the CD on the secondary market through your broker. If rates have risen since you bought it, expect to sell at a discount because buyers can get better yields on new issues. If rates have fallen, the CD may sell at a premium. The broker may charge a trading fee, and you won’t know the exact proceeds until the sale settles.
How to Actually Close the CD
Before you call the bank, pull up the Truth in Savings disclosure you received when you opened the account. It lists the maturity date, the interest rate, and the exact formula for the early withdrawal penalty. If you can’t find the original document, check your email or online banking portal; the bank was required to give it to you in a form you could keep.
Most banks accept early closure requests through online banking, by phone, or in person. Some require a written request by mail, and a few want that letter notarized. Have your account number, government-issued ID, and the routing and account numbers for the receiving account ready.
Partial Withdrawals
Some banks let you withdraw part of the balance and leave the rest earning interest at the original rate. The penalty then applies only to the amount you took out. Not every bank offers this, and minimums for the withdrawal and the remaining balance vary. Check your account agreement before you assume the option is there.
How Long the Payout Takes
Once the bank approves the request, funds typically arrive within one to three business days by electronic transfer or cashier’s check. You should get a final statement showing the closing balance, interest earned, and penalty withheld. Keep it. You’ll need it to reconcile the 1099-INT the bank sends at year-end and to claim the penalty deduction.