A certificate of deposit pays a better rate than a savings account because you agree to leave the money alone. Take it out early and the bank charges a penalty, stated not as a percentage of your deposit but as a number of months of interest.
How it works
The penalty is the interest your deposit would earn over the stated number of months, charged on the amount you withdraw at the CD’s own rate. Six months of interest on $10,000 at 4% is $200 — the bank takes that whether or not the CD has been open six months.
The penalty can reach into your principal
This is the part that surprises people. If you break a CD after two months, you have earned roughly two months of interest but the penalty is six. The difference comes out of the money you deposited, so you get back less than you put in. A CD is one of the few savings products where an early exit can leave you with less principal than you started with, and that is by design rather than a quirk — federal rules require a minimum penalty of at least seven days’ interest on anything withdrawn in the first six days.
What this does not include
Penalty schedules are set by each bank, not by regulation beyond that seven-day floor, so the months figure is an input — read it off your account disclosure rather than assuming a standard. This also does not model the tax treatment of forfeited interest, which is deductible in some circumstances, or any bank that waives penalties for specific hardships.
How to use this calculator
- Enter the amount you need to withdraw before maturity.
- Enter the CD’s interest rate and the penalty in months, both from your disclosure.
- Optionally enter the interest earned so far — the calculator will then tell you whether the penalty eats into your principal.
Frequently asked questions
Can the penalty be larger than the interest I have earned?
Yes, and on a young CD it usually is. The penalty is a fixed number of months of interest regardless of how long the CD has been open, so breaking a six-month-penalty CD after two months costs about four months of interest more than you have earned. That shortfall comes out of your deposit.
Is there a legal maximum penalty?
No. Federal rules set a minimum — at least seven days’ interest for a withdrawal in the first six days — but no cap. Banks commonly use three months on short terms and six to twelve months on longer ones, though that is convention rather than law.
Do no-penalty CDs exist?
Yes. They allow withdrawal after an initial holding period without a penalty, and they pay a lower rate in exchange. Whether that trade is worth it depends on how likely you are to need the money, which is exactly the comparison the CD versus savings calculator on this site is for.
Does the penalty apply if I only withdraw part of the CD?
Usually the penalty is charged on the amount withdrawn rather than the whole balance, which is what this calculator assumes. Some banks do not permit partial withdrawals at all and require the CD to be closed. Check the disclosure.
