What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Calculate the Penalty on an Early Withdrawal of a CD

Original post by Charlotte Johnson of Demand Media

Shorter maturity terms and higher yields sometimes equal higher early withdrawal penalties.

Saving money is a wise financial decision that demonstrates personal discipline and helps you to prepare for the future. A common method of savings is in the form of a CD or "certificate of deposit." Banks offer various types of CDs. Some CDs mature in six months, whereas others take five years to mature. If you withdraw a CD before its maturity, you will incur fees based on your bank's early withdrawal policies.

Step 1

Convert the interest rate on your CD into a decimal by dividing it by 100. For example, if you have a CD that is earning 2% interest, you would divide 2 by 100 to get 0.02.

Step 2

Ask your banker the penalty fee for the specific early withdrawal terms for your CD. Many banks have varying fees, such as 3 months interest if the CD is a 12-month maturity account or 6 months interest if the CD requires more than 12 months until its maturity date.

Step 3

Multiply the interest rate in decimal form times the principal of your CD. For example, if you have $10,000 in a CD that collects 2% interest per year, you multiply 0.02 times 10,000 to get 200. This means that you would earn $200 per year in interest.

Step 4

Divide the interest per year by 12 to find out the interest earned per month. In this example, you would divide 200 by 12 to get $16.67 of interest monthly.

Step 5

Multiply your answer from step four times the bank's terms (from step two) to calculate your penalty fee. For example, consider a $10,000 CD that has a term of 5 years and a 2% interest rate. If you withdraw the CD early and your bank charges 6 months' interest, you would multiply 6 times $16.67 to get a penalty of $100.02. This penalty would come from the interest you would have accrued, but would not deduct anything from the original principal amount. This feature makes CDs a relatively safe investment.

                   

Tips & Warnings

  • Talk with your banker to see if they have a flat rate fee. Although this is much less common than percentage fees, some banks charge a set fee (such as $30 or $50) for the early withdrawal of a CD.

Things Needed

  • Calculator

References

About the Author

Charlotte Johnson is a musician, teacher and freelance writer with a master's degree in education. Johnson has written numerous articles for various websites. She has covered a wide range of topics including health, education, the arts, animals and parenting.

Photo Credits

  • BananaStock/BananaStock/Getty Images

Advertisement