How the penalty works

Most CDs set the early withdrawal penalty as a number of months of interest, and the number usually rises with the term. The calculator estimates a month of interest as the deposit times the APY divided by twelve, and the interest earned so far by compounding the APY over the months you held. Banks compute both in their own way, often using the stated interest rate and daily accrual, so treat the result as an estimate and read the disclosure for the exact method.

When the penalty is larger than the interest earned, which happens when you withdraw early in the term, the difference can come out of your principal at many banks. The walk-away figure shows that directly: below the deposit means the CD cost you money to break.

The default example

The numbers already filled in describe a 10,000 dollar deposit at a 4.00% APY on a 12-month CD, broken after four months with a penalty of six months of interest. Four months of compounding earns roughly 131 dollars. Six months of interest at that rate is 200 dollars. The penalty is bigger than what was earned, so the walk-away figure lands below the deposit. Change the withdrawal month to eight and the result turns positive again, which shows how much the timing of an early withdrawal matters.

Before you lock cash up

Cash a trader may need at short notice sits more comfortably in a savings account or a brokerage sweep than in a CD. Brokered CDs work differently again: you usually sell them on a secondary market instead of paying a penalty, and the price can be below what you paid if rates have risen. See how to choose a CD and how to choose a savings account.