How to Avoid Early Withdrawal Fees on A CD

As interest rates have begun to rise, I’ve received numerous questions from readers asking about ways that they can get out of paying early withdrawal fees on long-term Certificates of Deposit that they may have bought a couple of years ago, but that are no longer attractive.

As I stated in an earlier article, I strongly recommend against breaking any CD until the rate that you are earning falls below the current rates on comparable savings rates. In a rising rate environment, you do not want to break a CD in order to get another CD that you may then need to break. I have 2 years left on a 5-year CD at 2.25% and I will not break it until online savings rates are firmly above 2.25%.

If you do need to withdraw your money early, the withdrawal is entirely at the discretion of the bank or credit union. Most banks and credit unions will waive it because of death or adjudged incompetence of the holder, or because a bank merger causes the holder to be over FDIC limits. Early termination fees may be waived due to other hardships at the bank’s or credit union’s discretion.

Reg D forbids banks from allowing any withdrawal within 7 days of issuance (this restriction also applies to No Penalty CDs), but there are no other limits on a bank’s ability to waive early withdrawal fees. Any bank officer (or other website) that will tell you that they are lawfully required to charge the early withdrawal fee is misinformed.

However, a contract is a contract and you enter into a time deposit contract when you purchase a CD. When you break a contract, any contract, the counterparty has a right to extract penalties. In this case, the bank has made commitments based on its expectation that they are borrowing the money for the course of the CD at the indicated rate.

As with any contract, the party entitled to a penalty can exercise its discretion not to extract the penalty (to waive it). But, if I were an officer of a bank or credit, I would not be inclined to waive it simply because the customer can now get a higher rate. Would I waive it if the customer committed to do further business with my bank or credit union? Would I waive it on a one-time basis if the customer agreed to roll into a higher yielding but longer term CD? Maybe.