2010 CD Study
Stacks of golden coins against golden dollar
Survey: CD early withdrawal is costly

McBride compares two CD maturities and returns -- a six-month CD yielding 1.3 percent and a one-year CD yielding 1.6 percent.

"The additional 30 basis points doesn't begin to compensate for the six-month interest earnings penalty if you have to cash out early," he says.

Comparing yields after penalty
Six-month CD12-month CD
Initial deposit$10,000$10,000
Ending balance at maturity$10,064.79$10,160.00
Balance after early withdrawal at eight monthsN/A$10,026.49

Purchasing liquid CDs may be one way to avoid an early withdrawal penalty if you plan to dump today's sluggish CDs for higher-yielding replacements once rates rise.

Liquid CDs offer relatively low yields when compared to standard CDs of the same maturity. However, they also offer the convenience of penalty-free withdrawals -- typically after an initial seven-day period.

Currently, liquid CDs are not widely available -- only 21 institutions out of the 100 surveyed offer them. None of the credit unions Bankrate surveyed offers liquid CDs.

McBride says it is important to examine the terms of a liquid CD closely before purchasing this type of product.

"Terms vary widely, so be sure to know the specifics before investing," he says.

"Also, gauge the difference in yield on the front end versus non-liquid CDs," he says. "You may be better off with a traditional CD of a shorter maturity."

For a dedicated fixed-income investor, liquid CD yields may not be high enough to make them worthwhile.

Donald Cummings, managing partner at Blue Haven Capital in Geneva, Ill., recommends investors skip liquid CDs.

"The investor is paying for liquidity and that liquidity is something that the investor can create for himself," he says. "The opportunity cost is way too high."

If liquidity is priority, a high-yield money market account could be another option for short-term savings.

Cummings also recommends savers build a CD ladder into their portfolios. This allows them to keep some liquidity while also taking advantage of some of the higher yields on longer maturities.

"If one thinks we will have moderate, sustained interest rate increases starting six months from now and continuing quarterly for the next few years, I say ladder the portfolio out to about six or seven years, with the bulk of the investments in the three- to five-year sector," he says.

"The investor ends up moving out a bit on the curve in a couple years when rates presumably are up another 1 percent or so, yet has kept liquidity and captured some of the longer rates available out on the curve," he says.

To learn more about CDs, check out Bankrate's 2006 early withdrawal penalty study and the 2008 survey to find the best CD rates.

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