Should I Break My CD Early for a Better Rate? - NerdWallet (2024)

FAQs

Should I Break My CD Early for a Better Rate? - NerdWallet? ›

Avoid early withdrawal fees. Although short-term CDs require less time to wait to access your money and therefore less need to incur the penalty to get money early, long-term certificates have more time to earn interest. (Breaking a CD early for a better rate can sometimes make sense, though.)

Paying an early withdrawal penalty could also make sense if your CD is earning considerably less than current interest rates. For example, if you have a long-term CD earning a 2% APY, and new CDs offer APYs in the 5% range, you should consider cashing out your long-term CD as it could mean earning 3% more on your cash.

And the earlier you withdraw money from a CD, the less interest you'll earn. Sometimes if a withdrawal is early enough, a penalty can include part of the principal, or the initial sum of money you deposited, meaning you can lose money on a CD.

How much you earn on a $100,000 CD varies, depending on the APY. For example, if your CD has a 5% APY, you'd earn $5,000 after one year.

If you believe interest rates will stay elevated for the near future or need regular income, CD laddering may still make sense. If you're concerned about interest rates falling in the future and don't expect to need access to your funds, locking in today's high rates for the long-term may make more sense.

Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

In many cases, it makes sense to leave your money in a CD for the full term to avoid having to pay the early withdrawal penalty. However, there are times when you decide paying the penalty is worth it. One example would be when you need the money to cover an emergency expense.

However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.

In summary, a certificate of deposit gives you steady and safe returns. Investing $15,000 in a CD could lead to substantial gains, regardless of the CD's length. However, make sure you won't need that money while the CD is active because withdrawing early usually incurs hefty penalties.

Typically the longer the term, the higher the CD rate is. You can earn more interest than short-term CDs with terms longer than a year and up to three years. The national average rate for a three-year term is 1.41% APY, and you can find higher yields at some banks.

Is it better to put money in a 401k or a CD? ›

If you're a long way out from retirement, a CD probably isn't your best savings option. Retirement accounts like 401(k)s and IRAs offer tax advantages and potentially higher returns in the long run.

CD account interest rates will drop

"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."

At Capital One, for example, you can earn a 4.25% APY on a 6-month CD. With a 12-month CD, you're looking at an APY of 5.00%. If you're depositing $5,000, your 6-month CD will give you about $109 in interest after half a year. With a 12-month CD, you're looking at a little over $131 in interest at the 6-month mark.

For CDs with terms of 24 months or less, the penalty is 90 days of simple interest on the dollar amount you withdraw early. For CDs with terms greater than 24 months, the penalty is 180 days of simple interest on the dollar amount you withdraw early.

How to avoid taxes on CD interest. One way to postpone being taxed on CDs is to put them in a tax-deferred individual retirement account (IRA) or 401(k). As long as money placed in a traditional IRA is below the annual contribution limit, interest you earn may be tax deductible.

That said, there are always collectors looking to complete a set, or replace a popular CD they owned in their younger years. And whatever they might pay — be it $5 or $10 — isn't a bad price for something that's been gathering dust in the basem*nt, Shrum noted. “It's a trophy for some people,” Shrum said.

A brokered CD is an example of a CD that you can sell on the secondary market. Brokerages and independent salespeople are sometimes able to negotiate a higher rate. This may be possible if they can promise to deliver a specific dollar amount to the financial institution, according to the SEC.