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February 20, 2009

Early Withdrawal Penalty

Your Guide



A  penalty that applies to certificates of deposit (CD)s ( or time deposits) from which withdrawals are made before the maturity date. The penalty is assessed on the interest.

An early withdrawal penalty of at least seven days’ simple interest is usually assessed on amounts withdrawn within the first six days after deposit

The early withdrawal penalty may be waived under the following circumstances:

  • Where the CD is maintained in an IRA , and is paid within seven days after establishment of the IRA ( IRA revocation) ,
  • Where the CD is  maintained in a qualified plan account-Provided that the depositor forfeits an amount at least equal to the simple interest earned on the amount withdrawn;
  • Where the depository institution pays all or a portion of a CD representing funds contributed to an IRA or qualified plan account ,when the individual for whose benefit the account is maintained attains age 59 ½  or is disabled (as defined Code  72(m)(7)) or thereafter;
  • Where the depository institution pays that portion of a CD on which federal deposit insurance has been lost as a result of the merger of two or more federally insured banks in which the depositor previously maintained separate CD s, for a period of one year from the date of the merger;
  • Upon the death of any owner of the CD  funds;
  • When any owner of the CD  is determined to be legally incompetent by a court or other administrative body of competent jurisdiction; or
  • Where a CD is withdrawn within ten days after a specified maturity date even though the deposit contract provided for automatic renewal at the maturity date.

Referring Cite

Regulation D, 12 C.F.R. Sec. 204.2(c)(1);  12 C.F.R. Sec. 563.3-1(a)  ; 51 Fed. Reg. 10804

Additional Helpful Information

  • Often confused with the early distribution penalty, when referring to IRAs, qualified plans, 403(b)s, and 457(b)s

  • The early withdrawal penalty on an IRA CD is not rollover eligible. For instance, if the IRA owner withdraws a CD balance of $1,000, and the early withdrawal penalty is $50, only $950 is rollover eligible.

  • The early withdrawal penalty is not treated as a distribution, and is therefore not reported on IRS Form 1099-R

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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