How Do I Avoid Penalty Interest on a CD?

What we’ll cover:

  • Why banks charge penalties for early withdrawals on CDs
  • The ways you can avoid an early withdrawal penalty
  • How you can withdraw interest from a CD without being penalized

There are times when you just need to access your money ASAP – no hassle, no penalties, no strings attached.

If you’ve got money in a traditional or online savings account, accessing that money when you need it should be straightforward. 

But if your money is parked in a traditional Certificate of Deposit (CD), you likely cannot touch those funds until the CD reaches its maturity date. That could mean waiting to withdraw for months or even years, unless you’re willing to pay a penalty to withdraw money early. 

However, there are a few ways (and reasons) you may be able to withdraw your money from a CD without getting dinged by penalties. One way is to use a No-Penalty CD (more on that below). But that’s not your only option.

But first, what’s a CD? 

Before we dive into all the ways you can avoid a CD withdrawal penalty, let’s cover the basics of CDs. 

A CD is a type of deposit account that typically earns higher interest rates than traditional savings accounts, but comes with a fixed withdrawal or maturity date. 

Depending on the CD, you may be able to receive payouts monthly, quarterly, semiannually or annually.

On the one hand, CDs typically carry higher interest rates (and those rates are usually fixed for a length of time) when compared to traditional savings accounts. 

On the other hand, money in a CD is often less accessible. 

Can I withdraw interest earned from a CD?

When it comes to withdrawing interest, CDs can be more flexible than you think. Some banks allow you to withdraw the interest you earn from a CD before it matures. 

Typically, when you open an interest-bearing CD with a bank, you can choose one of two courses of action with the interest that you earn – (1) you can allow the interest to continue compounding in the CD, or (2) you can receive interest payments paid to you in disbursements. 

Different banks have different rules about if, and how often, you can receive interest payments. Depending on the CD, you may be able to receive payouts monthly, quarterly, semiannually or annually.

The reason behind CD penalties for early withdrawals

Ever wonder how banks make money? One way: fees. Some banks charge account fees, ATM fees and, yes, CD early withdrawal fees (for the record, Marcus doesn't charge fees on the Online Savings Account or No-Penalty CD). 

When you deposit funds into a CD, a bank can use that money to make loans or other investments. 

Theoretically, when you open a five-year CD, you’re giving the bank five years to use those funds for their loan or investment activities. 

To withdraw your money early means those banks can't use those funds.  As a result, they may face penalties of their own based off money lent or investments made. In an effort to avoid this situation, banks often issue penalties for early withdrawal of funds from a CD.

What is the actual early withdrawal CD Penalty?

Every bank has its own rules for penalties. With a Marcus high-yield CD, for example, you cannot withdraw your principal at any time prior to maturity. If you do withdraw principal from your CD prior to maturity, you will be charged a fee based on the term of your CD and the principal investment that you made. 

Daily simple interest is calculated by multiplying your interest rate (not Annual Percentage Yield) by the amount of principal in your CD account and dividing by 365. To calculate CD early withdrawal penalty, multiply the daily simple interest by the number of penalty days listed above.

How you can avoid CD early withdrawal penalties

Some banks issue interest payment disbursements throughout the term of your CD, which is one way to access money from your CD without incurring an early withdrawal penalty.

Some CDs allow for early withdrawal penalties to be waived outright in extenuating circumstances, such as:

  • Death
  • Disability
  • Legal incompetence

Get a No-Penalty CD

A Marcus No-Penalty CD gives you the freedom to cash out a CD before it reaches its maturity date, without a cd penalty for early withdrawal. There are some restrictions though. With a Marcus No-Penalty CD, for instance, you can withdraw your total deposit beginning seven days after you’ve funded the CD. Just keep in mind – if you do withdraw funds from a Marcus No-Penalty CD before it matures, you’ll need to take out all of your money since a partial withdrawal isn't an option.

Benefits include:

Interest rates. No-Penalty CDs give you the ability to take advantage of rising interest rates. If you open a CD and rates rise during that time, you may not want to miss out on the opportunity to earn a higher rate. A No-Penalty CD gives you the flexibility to do just that.

Ready access. No one sets out to open a CD with an eye toward withdrawing their money early. But life happens and knowing there's an option to withdraw early provides peace of mind.

A Marcus No-Penalty CD is a great option. It can help you achieve your savings goals while leaving flexibility to handle the unexpected. Learn more about how Marcus could help.

Get the CD that lets you walk away with your entire balance, beginning 7 days after funding

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.