When they say you get a penalty for pulling $ out of a CD b4 maturity, is that principal, or interest also?

Question

When they say you get a penalty for pulling $ out of a CD b4 maturity, is that principal, or interest also?

Answer 1

Generally you would sacrifice a specified amount of past interest.

IRS Publication 550 says: "Penalty on early withdrawal of savings.    If you withdraw funds from a certificate of deposit or other deferred interest account before maturity, you may be charged a penalty. The Form 1099-INT or similar statement given to you by the financial institution will show the total amount of interest in box 1 and will show the penalty separately in box 2. You must include in income all the interest shown in box 1. You can deduct the penalty on Form 1040, line 30. Deduct the entire penalty even if it is more than your interest income. "

Of course if this all happens within an IRA or Roth IRA there is no 1099-INT (and no tax deduction for penalty).

Answer 2

It depends on how long you have held the CD.   When you redeem a CD early,  the bank will compute the interest to date.  Then compute the penalty and subtract the penalty from the total principal and interest due you.  

If you have only had the CD for a short time, the penalty could be more than the total interest earned.  Which means you would have to pay part of the penalty with your principal.

Answer 3

Its interest.  And you can deduct the penalty on your income tax without itemizing.