Pros and cons of CD early withdrawal

"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."

“If you absolutely, positively need the money, then you have to pay the price.”

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 percent rate and 3 percent 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 is 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 one, you just break one and the other nine 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.

“Rather than buying one $10,000 CD, why not buy 10 $1,000 CDs?”

"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's not 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.


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