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If there’s a golden rule to certificates of deposit, it’s this: Don’t withdraw before a CD term ends; otherwise, you pay a penalty.

But sometimes breaking this rule pays off.

“If a person opens a CD when interest rates are low and [then] interest rates rise significantly, it can make sense to break a CD early,” Andrea Brashears-Lusk — a certified financial planner and president and founder of Wise Financial Counsel in Fort Washington, Maryland — said in an email.

If you want to break your CD, it’s best to check the math to see what you lose on an existing CD and what you gain on a new CD or other investment. Online calculators may help with this.

Let’s dive in.

3 steps to see if changing CDs is worth it

Let’s assume that a CD is generally working for you. (We’ll discuss other investment options later.) You put an upfront amount of money into a CD and won’t need to withdraw until the term ends months or years from now. You have a guaranteed rate of return since a CD usually has a fixed rate.

But in a rising-rate environment, a CD’s fixed rate has a downside: You miss out on newer CDs that have increasingly higher rates.

For example, the national average rate for a one-year CD is currently 0.90%, compared with what it was in January 2022, 0.13%, according to the Federal Deposit Insurance Corp.

Let’s see if you should withdraw from your CD early and get a new one.

1. Calculate what you would lose from breaking your current CD

There are typically two costs to a CD’s early withdrawal: a bank’s penalty and the amount of remaining interest you would’ve earned had you kept that CD until maturity. Use this early withdrawal penalty calculator to get both costs and add them up.

Example

You put $10,000 into a CD with a five-year term and a 1% annual percentage yield. If you hold the CD until maturity, the total amount you can earn is $510 in interest. But instead, you withdraw when there’s one year left. Your bank charges a penalty that’s equal to, say, one year of simple interest.

The penalty would be about $100 and the total future interest forfeited (the last year’s worth) is about $200, when slightly rounded. Combined, you lose $300.

Your total balance upon withdrawal, including your initial deposit, is $10,210 (compared with the $10,510 you would’ve earned for a full term).

2. Calculate the future earnings from a new CD

Find a CD with a higher rate and see what interest you would gain, assuming you hold the CD for the full term. Use a CD calculator to help.

Example

Building off of the same scenario as before, place your withdrawn balance of $10,210 into a new five-year CD that has a rate of 4%. The total interest you’d gain in five years, after minor rounding, is $2,210. Your future balance would end up being roughly $12,420.

3. Take the difference between future CD gains and the first CD’s losses

Subtract the total interest you would earn from the new CD and the total cost you would pay from the old CD. The cost you would pay from the old CD includes both the early withdrawal penalty and the future interest lost:

New CD interest – Old CD losses (which includes the Penalty + Future interest lost)

  • If the result is positive, you would benefit from breaking the first CD early. You would recoup the loss and earn more money from the second CD.
  • If the result is negative, hold onto the first CD until maturity to avoid losing more money than you’d gain.

Recap of the example

$2,210 – $300 = $1,910

What else to consider

Comparing the returns of two CDs is straightforward because CDs generally have fixed rates. (The exceptions are step-up and bump-up CDs.) You can calculate future gains with high confidence. In contrast, returns from the stock market fluctuate widely, and even rates on regular savings accounts are subject to changes over time.

Bonds, on the other hand, can have fixed interest rates, so you can compare the returns of CDs with some types of bonds, such as Treasury bonds or notes. However, bonds are different enough from CDs that they form a separate part of your overall savings and investment portfolio and may factor into savings goals differently than CDs do.

Note that a CD is for a dedicated sum of money that’s not part of your everyday savings or long-term investments. A high-yield savings account is a better place for an emergency fund, which can consist of several months’ worth of living expenses.

As certified financial planner Andrea Brashears-Lusk says, getting “a CD can be a good opportunity to get more bang for your buck on savings beyond an emergency fund.”