Here's What Happens When You Cash Out Your CD Early

Life often serves up a buffet of tough choices. Stock values drop and investors have to decide if they're worth keeping; home buyers, under market pressure, find a home (finally) then have to decide if it's worth waiving the inspection; Triscuits go on sale and you have to decide if it's worth paying extra for cheese. 

Likewise, certificates of deposit (CD) could present a tough choice: If your money is locked up in one, should you cash out early? Although an emergency might compel you to make that decision, it'll come with consequences. Here's what happens when you cash out your CD early. 

Breaking your CD contract will cost you in penalties and opportunity costs 

Unless you have a no-penalty CD, an early withdrawal penalty will be charged when you cash out your CD early. Most penalties are equal to several months' worth of simple interest (depending on how long the CD's term is) and will be deducted from your balance. If your earned interest doesn't cover the full penalty, the rest will be taken from your principal. 

That's the worst that could happen to you. Ideally, your earned interest would cover the penalty. But if it doesn't, you could lose money.

You also have to think about opportunity costs. This would be the interest you could have earned had you kept your CD contract intact. 

For example, let's say you put $10,000 in a 12-month CD last month, when rates were 5.25%. At this point, you would have earned one month's worth of interest, or roughly $43. If the CD had an early withdrawal penalty of six months, you'd pay about $260 to cash out early. Subtracting the interest you've earned, your total penalty is $217.

But that's not the full picture. You're also missing out on another 11 months of interest. If you had left the CD alone for the full term, you would have earned about $482 more. With penalties and opportunity costs, you're looking at a price of almost $700 to cash out early. 

When cashing out your CD is worth it 

In most cases, it makes financial sense to let your CD mature. Cashing out early will result in a hefty penalty. That said, there are some scenarios in which cashing out early will make the most sense for you. 

The most common is emergency expenses. If you're facing a medical bill, car repair, or other unexpected expense, you might have to dip into your CD to foot the cost. Although using a credit card with a long 0% APR period could be another option, even that will only postpone the day when you have to pay interest on your charges. At any rate, it's better to dip into your CD than to face the hefty interest rates on loans and credit cards. 

Another reason to cash in your CD is to pursue better financial opportunities. For example, let's say you want to use your CD money as a down payment on a house. If you decide that the early withdrawal penalty pales in comparison to the interest that you can save by putting more money down, it might be worth paying the upfront cost to do it. 

Ultimately, personal finances aren't black and white. While cashing out a CD could lead to penalties and missed opportunities, it could also make financial sense. Examine your options -- including credit cards -- but don't beat yourself up if you need to access this money for an emergency.