Does It Ever Make Sense to Break a CD Early?

A certificate of deposit is a kind of investment that allows you a guaranteed rate of return in exchange for keeping your money invested for a period of time. You'll make a lump sum investment and will be offered a higher interest rate than the typical savings account. But, there's a catch. You will not be able to withdraw your money for a designated time period. If you access your funds, you'll be charged a penalty.

Because of the fees associated with breaking a CD early, it's typically a good idea to try to avoid doing that. But that's not always the case. There are times when it could make sense to get your money out ahead of schedule, even if that means you have to pay added costs and lose some promised returns. 

When might breaking a CD make sense?

Breaking a CD early can make sense in some situations. For example, you may want to withdraw your money if interest rates have increased significantly and you can actually make more by paying the penalty for early termination of your current CD and investing the funds you get back in a different one that pays a much higher yield. 

Say, for example, you had a CD paying you a 1% annual percentage yield with a five-year term, you invested $10,000 in it, and you had a year left on your investment. But, interest rates have now gone up dramatically and you could buy a CD with a 4% APY and a five-year term.  

If your penalty is a year of simple interest, you'd incur a $100 fee and lose around another $100 because you won't get paid interest over that last year. If you withdrew the money, you'd walk away with about $10,310 in total (less than the $10,510 that you'd have ended up with if you left the CD alone). 

Once you invest that money in that new CD paying 4%, though, you'd walk away with about $12,540 at the end of that new five-year term -- making around $2,230 in interest over that time period. Losing $200 in order to make $2,230 is well worth it as long as you plan to leave your money invested in CDs anyway.  

You may also want to break a CD early if you have a dire need for the money and don't want to end up in debt. If you have a choice between paying credit card interest at 20% or worse, or payday loan interest at upwards of 400% APY, breaking the CD is usually the better move. 

How to decide whether to break a CD 

Ultimately, the best way to decide whether to break a CD is to look at what you'd lose by doing so and compare it to the money you could make if you emptied the account and put the money into a new one instead. 

If you find that the interest on the new CD minus the losses from breaking the CD early is a positive number, you'd end up better off with early termination.