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With interest rates on savings accounts at historic lows, certificates of deposit (CDs) are on the minds of many.

The longer the term, the higher the rate of return. That also means a longer period of your money being locked up — out of reach for emergencies and/or unexpected life changes. Herein lies the rub with CDs.

You can, of course, access your money earlier than the prescribed term, but penalties can be steep.

What’s An Early Withdrawal Fee?

When you sign up for a CD, the banker across the desk is obligated to tell you about all the money you could lose if you withdraw the funds before the CD matures.

Pay close attention here, because there is no “norm” or standard policy for early withdrawal. All banks are different. Federal law requires a minimum penalty of seven days interest for early withdrawal on any account called a “time deposit,” but the sky’s the limit when it comes to setting maximum penalty fees.

Chase Manhattan Bank, for example, sets a good example for maximum penalties. Their 12-Month CD carries a six-month interest penalty charge!

First let’s take a look at what you can expect to earn on a CD with today’s interest rates:

There are instances when early withdrawal will not result in a penalty, but they rarely occur. For example, if the account holder dies or is deemed mentally incompetent, there are outs. There are also loopholes for those over 59 ½ years old.

An upside regarding early withdrawal fees, though, is that you can deduct them at tax time.

Comparing Five Year CD Early Withdrawal Penalties

As noted above, different banks have different rules in regard to early withdrawal penalties.

If you decide to invest in a CD, you should go in with the mindset that this money is untouchable. Of course, life doesn’t follow rules and an emergency might throw a wrench into your plans.

Related: 5 Unique Alternatives to Savings Accounts to Save Money Now

When looking for the highest CD interest rate available, take into consideration their withdrawal penalties. You might find the highest rate may not always be the best when it comes to policies.

When you review the penalties for early withdrawal on five-year CDs from some of the most popular online banks, you find Ally stands out among the rest:

Bank NameInterest Rate (APY)Early Withdrawal Penalty
Discover Bank2.85%Nine Months Simple Interest
Ally Bank3.00%Five Months Interest
Synchrony Bank3.00%One Year Simple Interest
Sallie Mae Bank2.90%Six Months Simple Interest
FNBO Direct1.15%Six Months Interest

You can also see that a fee-free, five-year CD is non-existent. Unfortunately, if you are looking for a “no-risk” CD, you’ll have to sacrifice length and interest rate to do so.

Banks now more than ever cannot afford to have you pull money out of your CD early without receiving a penalty. And if they do offer a fee-free, no-penalty CD, it may be of little value to you.

Below are a few examples of where you can find no-penalty CDs, along with the rates and rules they carry:

    • CIT Bank – 2.05% APY on an 11-month CD. Minimum balance to open an account is $1,000 and the full balance can be withdrawn anytime after the first six days you deposit your funds.
    • Ally Bank – Up to 2.00% APY on an 11-month CD. Minimum balance and APY rates are as follows: $1,000, $5,000, $25,000 / 1.65%, 1.80%, 2.00%.  Same rules as the CIT account above; withdrawals are OK after six days.

Planning Emergencies Ahead of Time By “Laddering” Your CDs

If you have a knack for numbers or a financial advisor at your disposal, you might look into CD laddering. This is a formulaic, phased-in approach to investing in CDs that has been likened to dollar-cost averaging with stocks.

The goal is to invest at different rates of return, and to never lock up your money for more than a year.

Let me explain just how a CD ladder works and how it not only can help in emergency situations, but also give you the best rate of return.

Starting out, you’ll want to buy a number of different CDs; five, to be exact. You will stagger these maturity dates out (“laddering” your investments) by purchasing one each of a one-year, two-year, three-year, four-year, and a five-year CD.

Every year, beginning with the end of Year One, one of your CDs will mature. When it does, you should take that money and roll it over into a new CD, but this time with a longer term (preferably a five-year, to continue the ladder). This will also increase your interest rate, since the new five-year CD will come with a higher rate than the one-year that just matured.

The following year, your original two-year CD will then mature. Take that money and reinvest it in another five-year CD. Continue this cycle indefinitely; after four years, all of your CDs will be five-year, higher interest notes, and you’ll have one maturing every single year.

Here’s an example with numbers, in case that just confused you:

  • You have $10,000 to invest in year 2017
  • Find the bank(s) with the best rates on one-, two-, three-, four-, and five-year CDs.
  • Purchase one of each:
    • #1: a one-year CD for $2,000, maturing in 2018
    • #2: a two-year CD for $2,000, maturing in 2019
    • #3: a three-year CD for $2,000, maturing in 2020
    • #4: a four-year CD for $2,000, maturing in 2021
    • #5: a five-year CD for $2,000, maturing in 2022
  • After one year, CD #1 will mature. Take that $2,000 and reinvest it in a five-year CD. This gives you:
    • #2: a two-year CD for $2,000, maturing in 2019
    • #3: a three-year CD for $2,000, maturing in 2020
    • #4: a four-year CD for $2,000, maturing in 2021
    • #5: a five-year CD for $2,000, maturing in 2022
    • #6: a five-year CD for $2,000, maturing in 2023
  • At the end of the initial five years (2025, by this example), you’ll have had five CDs mature, which you reinvested. Since the five-year notes carry higher interest rates, you’ll be at optimal earning for the five-year CD ladder. You’ll now have:
    • #6: a five-year CD for $2,000, maturing in 2023
    • #7: a five-year CD for $2,000, maturing in 2024
    • #8: a five-year CD for $2,000, maturing in 2025
    • #9: a five-year CD for $2,000, maturing in 2026
    • #10: a five-year CD for $2,000, maturing in 2027

You can continue this cycle indefinitely, and you’ll always have access to at least a fifth of your CD investments in any given year, without penalty.

CD ladders are a proven method of maximizing your savings but can be complicated for an investing beginner. Make sure that if you choose to ladder your CDs, you research the benefits and risks in greater detail.

Even though long-term CD interest rates are better than high interest savings account rates, they’re not high enough to make them alluring to all kinds of investors.  The fear is that if I invest in a CD today, tomorrow the interest rate will go up. Make no mistake about it, either: interest rates are on the rise.

Facing an early withdrawal penalty could force me to keep my money tied up even if I can find better rates elsewhere. And that just flat-out stinks.

Banks like Ally — that offer a one-time “raise your rate” CD and also have minimum penalties for early withdrawals — certainly make investing in CDs more attractive. However, you may want to wait a few months for the economy to stabilize before tying money up in a long-term CD.

Author Bio

Total Articles: 158
After amassing more than $255,000 in debt on a math degree from the University of Miami, Michael now enjoys spending time at home and writing about personal finance.

Article comments

Ron says:

Because rates are so low, we’re just opening a new one 12 month CD every 2 months with money from our CapitalOne 360 savings account. Eventually, there will be six.

Mary Cheng says:

I have a $30,000 with Citibank 13 month CD, early withdrawal, what’s the penalty?

pam says:

discover just told me there would be an 18 month penalty for 5yr CD opened in 2016.

mike shi says:

BBVA compass bank has a penalty of 3% of total CD for CD over 12 months if I close early, I did not notice it when I open the CD.

KU says:

US Bank is the same! I have to pay $1500 to break a $50K CD, while they are paying me a laughable $75 in interest!

KU says:

US bank blew my mind when they said early withdrawal on a 19 month CD is 3% of the PRINCIPAL!!

Keith C says:

Your information regarding the EWP on Discover Bank’s 5 year CD is incorrect. Their EWP is 18 months, not 9 months.

MARTY says:

Just found out that Capital One wants to charge me $1500 on a $150K 12mo cd paying $18 a month. You do the math. I will wait the 10 months. What they have done is cost themselves almost 1 million in deposits from business’s I control. Very short sighted on their part but it is their business and can run it the way they want. As I can do as well. God I Love America.

Debra Albright says:

Banks have now gone from just deducting interest for early withdrawal on your CD’s to NOW deducting interest ”PLUS” $25.00 fee …. and 3% of the deposit amount withdrawn on a 24 month CD. This is criminal when the interest they are paying you is only 0.30000. Which equates to $30.20 in interest for the term, and if you withdraw early the fees will be $400.00. Unbelievable!