Maximize Your CD Earnings: When to Consider Early Withdrawal
If you purchased a CD during the past few years, there is a good chance that today’s new CDs offer even higher returns than what you currently get.
Rates have risen substantially over the past 18 months or so. Does it make sense to withdraw the money from your current CD a little early so you can invest it in a newer CD that pays a higher return?
The answer depends on your circumstances, and you might need to do some math to reach the right conclusion. In some cases, it can pay to make the switch. But in other situations, you might decide to stay put.
What Happens When You Withdraw From a CD Before The Term Is Up?
When you purchase a CD, terms and conditions dictate what happens if you withdraw the money early.
Federal law establishes a minimum penalty on early withdrawals. If you withdraw money within the first six days after you deposit it, you owe at least seven days’ worth of simple interest.
However, the law does not establish a maximum penalty, so it varies from bank to bank. In many cases, the type of penalty you will pay depends on the length of the CD term.
For example, on a six-month CD, you might owe 90 days of interest if you withdraw your funds early. On the other hand, a two-year CD might require you to pay something closer to one year’s worth of interest.
The precise penalty for each CD should be spelled out on the bank’s website, in promotional materials, and in the CD agreement.
Which Banks Have the Best CD Rates?
Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. We’ve compiled a list of some of the best CD accounts to help you find the ones that best fit your financial goals.
Why Would You Want to Withdraw From a CD Before It Expires?
There are many reasons why someone might want to withdraw from a CD before it expires.
Sometimes, people need the money now and cannot afford to wait until the CD matures. Withdrawing the money early can be expensive for the person who bought the CD, but those who encounter hard times might not have a choice.
Others may withdraw money from a CD prematurely because rates on new CDs have increased dramatically, and they want to cash out their old CD so they can cash in on a new CD offering a much better return.
For example, the Federal Reserve has steadily increased the federal funds rate since early 2021. This has had a trickle-down effect on CD rates, and CDs typically pay far higher rates today than they did at the start of the Fed’s rate-hiking campaign.
Other reasons you might want to withdraw money from a CD early include to:
- Make a down payment on a house or car
- Pay for an unexpected expense, such as a medical bill or a home repair
- Invest in stocks or a small-business opportunity
Early Withdrawal Alternative: No Penalty CDs
A “no-penalty CD” is a type of certificate of deposit (CD) offered by some banks or financial institutions. Unlike traditional CDs, which impose penalties for early withdrawals, no-penalty CDs allow you to withdraw your funds before the CD’s maturity date without incurring any penalties or fees.
Banks that offer no-penalty CDs include:
Marcus by Goldman Sachs
The Marcus no-penalty CD offers a simple way to earn a competitive fixed interest rate without locking up your funds. With no early withdrawal penalties, you can access your full balance just seven days after funding. You only need a $500 minimum balance to start, and there are multiple term options available to suit your goals.
Synchrony Bank’s No-Penalty CD introduces a fresh approach to flexible saving. This innovative 11-month CD has a competitive fixed rate and no minimum balance requirement to open. Starting just six days after funding, you can withdraw your entire account balance whenever you need it.
CIT’s 11-month CD offers security and flexibility. You can lock in a competitive rate and access your funds after seven days without penalty. There are no opening or maintenance fees. You can manage your account online or via the mobile app and benefit from daily compounding interest. CDs are FDIC-insured for peace of mind.
Here are some key characteristics of no-penalty CDs:
With a no-penalty CD, you can typically withdraw your funds at any time before the CD matures without being subject to the usual early withdrawal penalties that traditional CDs impose.
No-penalty CDs may offer competitive interest rates, although they are often slightly lower than those offered on traditional CDs with longer terms.
These CDs provide flexibility for savers who want to access their funds in case of emergencies or take advantage of better investment opportunities without worrying about penalties.
No-penalty CDs can have various terms, such as six months, 12 months, or more. The terms and conditions can vary depending on the bank or credit union offering the product.
Banks may require a minimum deposit to open a no-penalty CD, but the minimums are typically lower than those for traditional CDs.
How to Decide If It’s a Smart Idea For You
If you need money fast, it might be better to withdraw cash that is parked in a savings or checking account instead of tapping into a CD prematurely. You also prevent penalties by avoiding an early withdrawal on your CD.
However, not everyone has this option. It’s possible that withdrawing money from a CD might be your best or only choice. If that is your situation, you might have to accept paying the penalties associated with an early withdrawal.
On the other hand, some people consider withdrawing money from a CD early not because they have to but because they think they can get a better return elsewhere.
In those situations, it can help to do a little math to determine your best course of action. Before withdrawing from a CD prematurely, make sure the return on the new investment will compensate for the loss you will take when paying the penalty for an early withdrawal.
An online early withdrawal calculator can help give you a clearer picture of the pros and cons of early withdrawal.
For example, imagine purchasing a $5,000 five-year CD with an interest rate of 3.4% APY. Four years are left on the CD — or 48 months — and the early withdrawal penalty on this CD is 12 months of interest.
In this example, your penalty amount would be $167.18, and you would forfeit $739.80 in future interest. Taken together, those two amounts mean your decision to withdraw early from the CD would cost you $906.98.
That means when you cash in the CD early, you will get $5,002.82.
Now, imagine that the new five-year CD you are considering purchasing pays an interest rate of 4.5% APY. Using a CD calculator, you discover that if you took your withdrawal amount of $5,002.82 and bought this new CD, you would earn $1,231.40 in interest over the life of the CD.
Taking the amount you would earn on the new CD — $1,231.40 – and subtracting the penalty for withdrawing from the old CD ($906.98) from that amount leaves you with a positive return of $324.42.
That means dumping the old CD and grabbing the new one would make financial sense as long as you hold the new CD to maturity.
It’s essential to read the terms and conditions carefully before opening a no-penalty CD, as the features and benefits can vary from one financial institution to another. Additionally, while these CDs provide greater liquidity, they may offer lower interest rates than traditional CDs with longer lock-in periods. Savers should consider their financial goals and liquidity needs when deciding whether a no-penalty CD is the right choice.
How to Take Advantage of Rising Rates Without Being Locked into a Long-Term CD
CD rates are constantly changing. Sometimes, these changes are minimal, as they were for much of the past decade. During other periods, such as the last 18 months or so, CD rates can change dramatically.
There is no way to know for sure where CD rates are headed at any given time. Generally, in a rising interest rate environment, CD rates go up. In a falling interest rate environment, CD rates go down.
But even if you know that general truth, you cannot know definitively where rates are headed and how high they will rise or how low they will fall.
Given that uncertainty, you might want to hedge your bets by developing a strategy combining higher returns with more flexibility.
For example, many people unsure where rates are headed use a technique known as “laddering” when purchasing CDs. With a CD ladder, you buy several CDs with varying maturities rather than one with a single maturity.
So, instead of taking $5,000 and buying one single five-year CD, you buy five CDs – one with a maturity of one year, another with a maturity of two years, and so on.
The most significant advantage of a CD ladder is flexibility: You are not tying up all of your money for five years but can instead count on accessing a new pool of money each year as one of your CDs matures.
Each time a CD matures, you can spend the money or reinvest it in another new CD, hopefully at a higher rate.
The most significant disadvantage of a CD ladder is that you may sacrifice some return compared to purchasing a five-year CD at a higher rate. In addition, CD rates may have declined since you bought the CD that is now expiring.
Putting your money in a high-yield savings account is another safe alternative to locking yourself into a long-term CD. With a high-yield savings account, you can get a relatively high interest rate with the freedom to access your money anytime.
The downside of using a high-yield savings account is that the rate it pays is slightly lower than what you would get with a long-term CD.
The bottom line is that your chosen strategy will likely have pros and cons. No plan is perfect. Do your homework and select the strategy that works best for you.