You locked a $20,000 five-year CD at 3%, and a year later comparable CDs are paying 5%. Your money sits there earning two points less than the market, and it stays stuck for four more years. How much does it cost to break a CD early, and is paying the penalty to chase that 5% actually worth it? The answer is more favorable than most savers assume, because penalties are smaller than the interest left on the table in a rising-rate market.
How much does it cost to break a CD early: the penalty schedules
Almost every bank charges the penalty as a number of months of simple interest on the amount you withdraw, calculated at the CD's own rate. The exact number of months is in your deposit agreement, and it scales with the term. Here is what several major banks charge, per Bankrate's current tracking:
| Bank | 1-year CD penalty | 3-year CD penalty | 5-year CD penalty |
|---|---|---|---|
| Ally Bank | 60 days of interest | 90 days of interest | 150 days of interest |
| Capital One 360 | 3 months of interest | 6 months of interest | 6 months of interest |
| Bank of America | 180 days of interest | 180 days of interest | 365 days of interest |
| Bread Savings | 180 days of interest | 180 days of interest | 365 days of interest |
The spread matters. On a five-year CD, Ally charges about five months of interest while Bank of America charges a full year. Two savers with identical deposits can face penalties thousands of dollars apart, which is why the penalty schedule deserves the same attention as the rate when you are comparing CDs for a ladder.
Now the worked math. The formula is simple: divide the CD's annual interest by 365 for the daily figure, then multiply by the penalty days. A $10,000 one-year CD at 4% with a 90-day penalty costs about $99. A $10,000 five-year CD at the national average rate of 2.84%, broken after 12 months with a 12-month penalty, has accrued roughly $284 and owes a penalty of roughly $284, so the payout is $10,000 even: a year of earning nothing, principal intact. Held to maturity instead, that same CD would earn about $1,503 over five years. Those two numbers, $0 versus $1,503, are the real cost of the decision.
One correction to a myth I used to believe: the penalty can eat into principal. The penalty is calculated whether or not you have earned that much interest yet, so breaking a CD in its first days or weeks means the shortfall comes out of your deposit. By law the minimum penalty is seven days of simple interest, but almost nobody charges the minimum.
When breaking a rung actually pays: the break-even rule
Here is my honest rule, and I will own that it is mine: if the new rate pays back the penalty in under half the remaining term, break and reinvest. It is a heuristic, not a law, but it has served me well because it keeps the math anchored to time instead of vibes.
Take the opening scenario. $20,000, five-year CD at 3%, one year in. A twelve-month penalty costs about $600. Reinvest the $20,000 at 5% for the remaining four years: you earn roughly $400 more per year, or $1,600 total over four years. Subtract the $600 penalty and you are about $1,000 ahead of leaving it alone. (This is simple-interest math for clarity; compounding shifts the exact figure but not the verdict.)
The decision flips when the numbers are tighter. If the new rate is only 3.5% and three years remain, the gain is $300 a year for three years, or $900, against the same $600 penalty. The payback takes the full three years. In that case I would leave it: the margin of error on my own rate forecast is wider than $300 of profit.
Two edge cases round out the picture. First, some banks waive penalties for no-penalty CDs, which usually pay slightly less interest for the privilege; they are the right home for money you suspect you will move. Second, the IRS softens the blow a little: the penalty is deductible, reported on Form 1099-INT, so it offsets part of the interest you owe tax on. It never makes breaking profitable on its own, but it trims the bill.
Step back from the spreadsheet for a second: a ladder exists so you never have to break a rung in the first place. Every maturity hands you fresh cash at current rates, no penalty math required. If you keep reaching for the penalty calculator on a long rung, that is the signal to build shorter rungs next time.
Frequently asked questions
How much does it cost to break a CD early?
Most banks charge a set number of months of simple interest on the amount withdrawn. Typical schedules: 1 to 3 months of interest for CDs under 12 months, 3 to 6 months for 1 to 3 year CDs, and 6 to 12 months for 5 year CDs. On a $10,000 one year CD at 4%, a 90 day penalty works out to about $99.
Can an early withdrawal penalty take my principal?
Yes, it can, if you withdraw before you have earned enough interest to cover the penalty. This usually only happens if you break the CD within the first days or weeks. By law the minimum penalty is seven days of simple interest, but most banks charge far more than that.
Is it ever worth breaking a CD to get a higher rate?
Sometimes. Compare the penalty against the extra interest the higher rate earns over the time left on the old CD. A useful rule: if the new rate pays back the penalty in under half the remaining term, breaking is usually the right call.
Do I still pay the penalty in an emergency?
Yes, the penalty applies regardless of why you withdraw. That is why emergency funds belong in a high yield savings account, not a CD. In a ladder, consider keeping one rung short or holding one no penalty CD as the shock absorber.
Is the CD early withdrawal penalty tax deductible?
Yes. The penalty appears on your Form 1099-INT and is deductible on your federal return, typically on Schedule 1. The interest you earned is still taxable, so the deduction only softens part of the loss.
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