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An early withdrawal penalty is a fine levied on funds removed from an investment before they are allowed to be removed, according to the agreement signed. For example, cashing in a one-year certificate of deposit after six months will result in an early withdrawal penalty equivalent to a few month's interest. The purpose of an early withdrawal penalty is to punish an investor for withdrawing funds that the investor agreed to let an institution use for a stated period of time. Retirement accounts typically come with an early withdrawal penalty. For example, most accounts will levy an early withdrawal penalty on funds removed before age 59½. This early withdrawal penalty may be as much as 10% of the withdrawn amount.
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