The simple version

A certificate of deposit (CD) pays a fixed rate in exchange for leaving the money alone. Take it out early and you pay a penalty.

Federal rules set a floor on that penalty only for the first six days. After that, the bank's own agreement decides the price.

The numbers

• A time deposit requires an early withdrawal penalty of at least seven days' simple interest on amounts withdrawn within the first six days after deposit (12 CFR 204.2, Regulation D)
• A time deposit that allows partial early withdrawals must impose the same minimum again on amounts withdrawn within six days after each partial withdrawal (12 CFR 204.2, footnote)
• The regulation's minimum applies only to those six-day windows; it sets no figure for a withdrawal after them (12 CFR 204.2, by its text)

What the agreement usually says

Banks commonly express the penalty as a number of days or months of interest, often scaled to the length of the CD. A longer CD tends to carry a larger penalty.

The terms are in the disclosure you received when you opened the account. They vary from bank to bank and from product to product.

When the penalty reaches the principal

A penalty measured in interest sounds like it can only cost interest. That holds only after enough interest has built up.

Close a CD soon after opening it, and the penalty can be larger than everything it has earned. The rest comes out of the deposit.

The Real Cost lens on closing early

Here is the arithmetic with an amount, rate, and penalty we chose, using simple interest.

• A $10,000 CD at 4.00%, with a penalty of 90 days' interest, closed after 30 days.
• Interest earned: $10,000 x 0.04 x 30 / 365, about $32.88.
• Penalty: $10,000 x 0.04 x 90 / 365, about $98.63.
• About $66 comes out of the original $10,000.

The figures are ours and describe no real account. The method works on any CD: compare interest earned so far with the penalty in your agreement.

What this means

The federal rule is a floor for the first week. Everything a saver actually faces after that comes from one document the bank handed over at opening.

That document is worth reading at the start, when nothing depends on it.

What this is NOT

This article does not recommend opening, keeping, or closing any CD, and it names no bank. Early withdrawal penalties are set by each institution's deposit agreement and vary. The amount, rate, and penalty in the Real Cost section are illustrations we chose, using simple interest, and describe no real account. This article does not address how CD interest is taxed. Regulation D defines a time deposit for reserve purposes, and it is not a consumer protection rule about what a bank may charge later in a term.

Sources

• Electronic Code of Federal Regulations, 12 CFR 204.2: https://www.ecfr.gov/current/title-12/chapter-II/subchapter-A/part-204/section-204.2