When to Break a CD: The Decision Math
Breaking a CD feels like a failure because the bank frames it that way — 'early withdrawal penalty' is language designed to discourage the behaviour. The rational question is not 'should I break the rules?' but 'does the math of breaking this CD favour me, given the alternative available today?'
The Penalty Math
Early-withdrawal penalties are typically expressed as a number of days of interest: 90 days for 1-year CDs, 150–180 days for 2-year CDs, 180–365 days for 5-year CDs. On a $50,000 CD at 3.50% APY with a 180-day penalty: 180/365 × 3.50% × $50,000 = $863.01 in forfeited interest.
The Breakeven Calculation
After paying the penalty, you roll the remaining principal into a new CD at the current higher rate. The question is how many months the new, higher rate takes to recover the penalty. Breakeven months = Penalty amount / Monthly gain from rate increase. If the new rate is 5.00% and the old rate was 3.50%, the monthly gain on $50,000 is: ($50,000 × (5.00% - 3.50%)) / 12 = $62.50. Breakeven months = $863 / $62.50 ≈ 13.8 months.
Scenario 1: Short Remaining Term
If your 1-year CD at 3.50% has 4 months remaining, the opportunity cost of holding is small. Breaking it to chase 5.00% likely does not cover the penalty before the CD matures anyway. Hold.
Scenario 2: Long Remaining Term with Large Rate Gap
A 5-year CD at 3.00% opened in 2022 has 2 years remaining. Current 2-year CD rates are 4.80%. Penalty: 365 days of interest at 3.00% on $100,000 = $3,000. Monthly gain: ($100,000 × 1.80%) / 12 = $150/month. Breakeven: 20 months. Remaining term: 24 months. At 24 months, net gain from breaking: 4 months × $150 = $600. Break the CD.
When to Not Break
Do not break a CD purely because rates rose. The question is always whether the math favors you before the current term ends. If the rate gap is small (under 0.50%), the breakeven period typically exceeds the remaining term. If the penalty is severe (365 days of interest on a 5-year CD), the rate gap needs to be large and the remaining term long for the math to work.
Frequently Asked Questions
Is breaking a CD taxable?
The penalty is deductible, but the situation is more nuanced. If you break a CD and receive less than your principal plus accrued interest due to the penalty, the forfeited interest is deductible as a penalty on early withdrawal of savings (IRS Form 1040, Schedule 1, line 18). You still report the gross interest earned as income; the penalty is a separate deduction.
Related Products
1-Year Certificate of Deposit
4.60–5.30%
as of May 2026
5-Year Certificate of Deposit
4.00–4.80%
as of May 2026
No-Penalty CD
4.30–4.90%
as of May 2026
Primary Sources
- [1] IRS: Penalty on Early Withdrawal of Savings — irs.gov/taxtopics/tc558
- [2] CFPB: CDs and early withdrawal — consumerfinance.gov