When is it Worth It to Close a CD Early?

Interest rates are rising. I Bonds are paying 9.62%. A couple of months ago I opened a 5-year CD at 2.9%. I just got an email from my credit union about a 3.2% 23-month CD.

Of course, the “catch” with I Bonds and CDs is that, if I withdrawal too early, I lose interest. In the case of I Bonds, it’s 3 months of interest. For my 5-year CD, it’s 150 days of interest.

Which made me think - would it ever be worth it to close a CD early? Outside of an emergency, that it? In other words, what interest rate would I have to earn in order to make up the lost money?

After thinking for a bit, I came to the conclusion: I would have to make up the money lost in the same time as the remaining term of the original CD.

For instance, if my 5-year CD is half over, I’ll lose 150 days of 2.9% interest. That’s about 1.2% of the balance of the CD (2.9% × 150/365). If my balance were $1000, that’s $11.92.

So the new investment (say, another CD) would have to earn $11.92 more than 2.9% in the remaining two-and-a-half years. Originally the CD would have earned $74.08 more in interest ($1,000 × (100% + 2.9%) ^ 2.5 - $1,000). Therefore, the new CD would have to earn more than $86. In two-and-a-half years, that’s about 3.4%:

$1,000 × (100% + x%) ^ 2.5 = $1,086
solving for x% = ($1,086 / $1,000) ^ 0.4 - 100%

If you really want to be lazy, I made a little calculator below (just fill in the first three fields and it will autocalculate):

Interest rate, in percent (%)

Time lost, in years (so 6 months would be 0.5, 146 days would be 0.4)

Time remaining in years (two years six months would be 2.5)

Interest rate must be above