The question to ask yourself is: "Does 100% of this money absolutely, positively have to be safe or does 75% of it have to be absolutely, positively safe, and I can take 25% and a little bit of principal risk and a little bit of liquidity risk to get a higher rate?" Grealish says. "You have a CD bucket and an I-can-take-a-little-risk bucket."
Taking on risk
If you opt for risk, proceed with caution. A CD will stabilize your source of investment income, but other investments can be more volatile, says Frank Boucher, owner of Boucher Financial Planning Services in Reston, Virginia.
"If you're looking at breaking a CD to chase down a stock that might pay a higher dividend, that might not be a good strategy," he says.
A CD can be useful to lock up money you're saving for a major purchase, even one with uncertain timing such as a down payment for a house.
"If you've found a home you want to live in or feel you want to use for an investment, with interest rates being as low as they are on CDs, I wouldn't let the interest penalty deter me at all as far as breaking the CD and using that money," Boucher says.
On the other hand, a CD isn't a good place to find funds to pay for living expenses or splurge on unnecessary and unplanned purchases.
"Your CD's an investment and you want to treat it as such," Boucher says. "That's one reason why you have the CD. You think twice before you do something like that."
Is it an emergency?
True emergencies are unpredictable, but you should still plan to have cash at the ready and not locked up in a CD when unexpected expenses prove necessary.
For that reason, Olberding says it's better to keep emergency funds in a money market or savings account.
If you've already put your savings into a CD and now you need the cash early, compare the cost of CD early withdrawal with other options such as a brokerage margin account or home equity line of credit, Grealish says.
"If you absolutely, positively need the money, then you have to pay the price, and if you don't have other short-term alternatives available to you because it's not a short-term situation or you can't get the money, there's not much latitude," he says.
A broken CD beats a big credit card bill, too.
"If you're making a purchase that you don't have ready cash for," Boucher says, "cashing in that CD as opposed to putting that onto a credit card makes all the sense in the world because the interest rate would be much higher."
How costly are the penalties?
Banks almost always charge penalties when customers remove money from a CD before it's time. Grealish says that's a huge issue. Boucher says the penalty, usually a few months of interest, is not a deterrent.
Why the disagreement?
The lost interest might not be significant since CD rates are so low these days. But some CDs involve more painful or truly onerous penalties for early withdrawals.
Olberding of Guidepost Financial says he was flabbergasted to discover a CD with a 1% rate and 3% loss of principal penalty for an early withdrawal.
"That's terrible," he says. "You have to be aware of what the bank will charge, and you have to do the math."
Two ways to minimize the risk of early withdrawal penalties are to buy smaller CDs or CDs with different maturity dates, a strategy known as laddering.
"Rather than buying one $10,000 CD, why not buy 10 $1,000 CDs?" Boucher asks. "Then, if you have to break 1, you just break 1 and the other 9 are still intact."
Evaluate your reason carefully
CDs offer a secure, stable source of income, albeit at a low rate of return.
If that safety is your primary objective, and there's any chance you might need the money early, you'll likely want to avoid CDs that offer a slightly higher rate but have severe early withdrawal penalties, Grealish says.
"Suck it up and take the low rate," he says.
An even worse strategy than a higher-risk investment is to raid your CD early to make frivolous or unnecessary purchases.
"I wouldn't break a CD to buy a big-screen television," Boucher says.
Does death of a CD owner change things?
Some CDs allow beneficiaries to break out the cash without a penalty if the owner of the CD dies. But that option isn't required, so it's smart to find out what the bank's rules are before a decision is made.
Grealish says executors need to be very cautious because they can be held personally liable for poor decisions that harm the estate.
"They're on the hook. They have a fiduciary responsibility," he says. "If it was me, I'd certainly talk to the beneficiaries and say, 'I'm considering liquidating it. It's going to cost this much, but you can have the money now. How do you feel about that?'"
If the beneficiaries are comfortable with the decision, the money might as well be withdrawn and whatever penalty paid.
If not, Grealish says further discussion about various options would be prudent before the CD is liquidated.