Here's What Happens When You Take $1,000 Out of a CD 6 Months Early

Many investors have considered opening a certificate of deposit (CD) because the rates are favorable. For example, you can find a 12-month CD rate of over 5% right now.

While CDs can be a great place to stash extra money, they aren't for everyone. One big drawback is that when you put your money into a CD, you agree to keep it there for a certain period. If you take your money out early, you can be penalized.

Here's what happens if you withdraw $1,000 from a CD six months early.

You'll pay a penalty

CDs charge a fee if you withdraw your money before the term is up. For CDs with terms of 24 months or less, you'll pay a penalty of 90 days of simple interest on the amount you withdraw early. If your CD term is longer than 24 months, the penalty is 180 days of simple interest on the amount withdrawn.

The amount you pay for a CD penalty depends on the CD rate, the interest penalty your bank charges, and how much you withdraw.

How much an early withdrawal of $1,000 will cost you

Let's assume you invest $1,000 into a 12-month CD paying 5% interest, and your bank charges 90 days simple interest on the early withdrawal amount. If you withdraw the entire $1,000 after just six months, you'll owe about $12.20 in penalties.

If your CD term is longer, you may be charged 180 days of simple interest. For example, if you invest $1,000 into a 5-year CD paying 5% interest and withdraw the entire $1,000 six months before the CD term ends, your early withdrawal penalty fee will be $24.40.

How to avoid paying CD fees

The easiest way to avoid paying an early withdrawal fee is to not invest any money in a CD you think you might need for anything else. The money you invest in CDs shouldn't be a part of your emergency fund.

Investing in a no-penalty CD is another way to avoid early withdrawal fees. A no-penalty CD works the same way as a regular CD, but you can usually withdraw money penalty-free after about six days. However, keep in mind that getting your money out of a no-penalty CD usually takes longer than transferring money from a checking or savings account and they often have lower interest rates and shorter term lengths.

When taking money out of a CD makes sense

Sometimes, there are good reasons to take your money out of CDs early, even if you have to pay fees. Here are a few times it may make sense for you.

You can get a better rate elsewhere

If you learn about a CD option with a much higher rate, calculate your penalty on your existing CD to determine whether moving that money into a higher-yield CD may be worth the fee.

Your financial goals have shifted

Let's say you invested $15,000 in a 5-year CD one year ago. But now you're buying a house and need that money to help with a down payment. Paying a fee to withdraw the money from the CD may be a wise option.

You've had a financial emergency

While you shouldn't put money into a CD you may need for emergencies, sometimes life throws you bigger curve balls than you expect. If you're deciding between taking your money out of a CD early or racking up credit card debt to pay for the emergency, breaking the CD term early may be the better option.

CDs can be a good investment option, but they're far more restrictive than a savings or checking account. If you want to invest in a CD, think about how much cash you will be willing to part with over the term. If you are uncomfortable with the idea of locking up your money, opt for a high-yield savings account or a no-penalty CD.