Closing a CD early is almost always allowed, but the bank will charge an early withdrawal penalty equal to a set number of months of interest on the amount you take out. The exact penalty, whether it can be waived, and how the closure is processed all come from the deposit agreement you signed when you opened the account. A handful of federal rules can eliminate the penalty in specific circumstances, and the penalty you do pay is deductible on your federal tax return.
What the Penalty Actually Costs
Nearly every early withdrawal penalty is calculated as a certain number of days or months of simple interest on the amount withdrawn. If your penalty is 90 days of interest and your CD earns 5% annually, you forfeit roughly 90 days’ worth of that interest. Penalty amounts vary by bank and generally scale with the length of the term:
- Short-term CDs of 3 to 12 months: typically 60 to 90 days of interest.
- Medium-term CDs of 1 to 3 years: often 90 to 180 days of interest.
- Long-term CDs of 4 to 5 years: 150 days up to a full year, and sometimes as much as 18 months of interest.
Because the penalty is measured in interest, the higher your rate, the more dollars you lose. A 180-day interest penalty on a $10,000 CD earning 4.5% APY runs about $222; the same penalty on a CD earning 2% APY costs about $99.
One risk catches people off guard. If you close the CD so early that you haven’t yet earned enough interest to cover the penalty, the bank takes the shortfall out of your principal. A $10,000 CD with a $200 penalty and only $50 in earned interest pays back $9,850.
Most banks also do not allow partial withdrawals. Closing early usually means liquidating the entire balance. A few institutions permit partial withdrawals, but the same penalty applies to the amount removed, and federal rules add at least seven days of simple interest if a partial withdrawal happens within six days of the previous one.1eCFR. 12 CFR 204.2 – Definitions
The specific penalty for your account appears in the disclosures your bank provided when you opened it, required under Regulation DD.2eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) Pull that document before you make any decision.
When the Penalty Can Be Waived
Federal reserve rules on time deposits let a bank release CD funds without a penalty in two specific situations: the death of an account owner, or a determination by a court or other body with proper authority that an account owner is legally incompetent.1eCFR. 12 CFR 204.2 – Definitions The regulation says a bank “may” waive in these cases rather than requiring it, but in practice most banks do, and many commit to it in their deposit agreements.
A bank failure also ends the penalty exposure. When the FDIC steps in and an acquiring bank takes over the accounts, the original deposit agreement no longer exists, and you can withdraw during that transition without a penalty.3FDIC.gov. Is Your Bank Branch Relocating or Closing? If no bank acquires the accounts, the FDIC pays insured deposits directly.
Some banks also waive penalties for severe financial hardship, but there is no federal requirement that they do so. It’s entirely at the institution’s discretion. If you’re in that situation, call and ask.
IRA CDs Carry an Extra Layer
If your CD sits inside a traditional or Roth IRA, closing it early can trigger two separate penalties. The bank charges its normal early withdrawal penalty. On top of that, if you’re under 59½ and actually take the money out of the IRA, the IRS adds a 10% tax on the taxable portion of the distribution.4Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs For a traditional IRA, the withdrawal is generally taxable as ordinary income as well.
The 10% IRS tax has several exceptions, including:
- Total and permanent disability.
- A first-time home purchase, up to $10,000.
- Higher education expenses for you, your spouse, or your dependents.
- Unreimbursed medical expenses above 7.5% of your adjusted gross income.
- A series of substantially equal periodic payments calculated with an IRS-approved method.
- Birth or adoption expenses, up to $5,000 per child.
The IRS publishes a longer list of qualifying exceptions.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions One useful alternative: you can often avoid the 10% tax by moving the CD proceeds into another investment within the same IRA rather than withdrawing them. Rolling the money into a money market fund or another CD inside the IRA keeps the funds sheltered. You still owe the bank’s early withdrawal penalty, but the IRS penalty doesn’t apply because nothing leaves the retirement account.
You Can Deduct the Penalty on Your Taxes
The early withdrawal penalty is deductible, and you don’t have to itemize to claim it. Your bank reports the full interest earned on the CD in Box 1 of Form 1099-INT and reports the penalty separately in Box 2.6Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID You pay tax on the full interest but deduct the penalty on Schedule 1 (Form 1040), line 18.7Internal Revenue Service. Publication 550, Investment Income and Expenses
Because it’s an above-the-line deduction, it reduces your adjusted gross income directly. A $300 penalty at the 22% tax bracket saves you about $66 in federal tax. That doesn’t make you whole, but it softens the total cost. Keep the 1099-INT with your tax records.
How to Close a CD Early
The process is the same at most banks. You can start online through your bank’s portal, over the phone, or in person at a branch. Tell the bank where the remaining balance should go, usually a linked checking or savings account at the same institution. Without a linked account, expect a mailed cashier’s check, which adds several business days.
You’ll need to verify your identity. In person, that means a government-issued photo ID such as a driver’s license or passport.8eCFR. 31 CFR 1020.220 – Customer Identification Program Requirements for Banks Online or by phone, the bank uses security questions, credentials, or other authentication. Once you’re verified, funds typically arrive within one to three business days.
Before finalizing, run the math. Compare the penalty to the interest you’d forfeit by staying in the CD, and factor in the tax deduction. If you’re using the money to pay down high-interest debt or cover an emergency, early closure often wins. If not, a short-term personal loan or balance transfer can sometimes cost less than the penalty.
Alternatives Worth Checking First
Before you pay the penalty, look at three options.
Wait for the maturity window. Most CDs auto-renew when they mature. Federal rules require banks to notify you at least 30 calendar days before maturity for any auto-renewing CD with a term longer than one month, or at least 20 days before the end of a grace period lasting at least five days.9eCFR. 12 CFR 1030.5 – Subsequent Disclosures The grace period after maturity, typically 7 to 10 days, lets you withdraw or redirect funds without any penalty. If your maturity date is close, waiting may cost nothing.
No-penalty CDs (for next time). A no-penalty CD lets you withdraw the full balance plus earned interest before maturity without a fee. Federal rules still require the deposit to sit for at least six days after funding, with any withdrawal in that window subject to at least seven days of simple interest.1eCFR. 12 CFR 204.2 – Definitions After that, you can close whenever you want. The trade-off is a lower rate than a traditional CD of the same length.
Brokered CDs sell rather than close. If you bought your CD through a brokerage rather than directly from a bank, there is no early withdrawal request. You sell the CD on the secondary market to another investor, and the price depends on where interest rates have moved since you bought it.10Vanguard. Certificates of Deposit: Rates and CD Investment Options Rising rates since purchase mean you’ll likely sell at a loss; falling rates mean you may sell above face value. The outcome is less predictable than a bank penalty, but potentially better.