By Sabrina Karl
Whenever you’ve invested in a certificate of deposit, conventional wisdom says not to touch the money until the CD matures, to avoid triggering an early withdrawal penalty. But in a handful of situations, accepting the penalty can be a smart money move.
Cashing in early makes sense in two general categories: because you need the money or because you can earn more on the funds elsewhere.
Let’s say you need the money, because your plans or financial situation have changed, or you’ve decided to spend on a large ticket item you weren’t previously planning. If your alternative is to fund the shortfall with any kind of debt — such as a credit card, HELOC, or personal loan — those funds will cost you in the form of interest on the balance due, for however long you carry the balance. So if the CD’s penalty costs less than what you’ll pay in interest over time, cashing in the CD will ultimately leave more money in your pocket.
Sometimes, though, you’re happy keeping the funds invested, but the financial environment has changed and you can now earn more on that money by moving it to another investment.
Perhaps CD interest rates are significantly higher now than when you first opened your certificate. Or perhaps you’ve decided it’s a good time to invest some of the funds in the market instead of a deposit account. The calculation becomes one of estimating how much more you expect to earn by moving the money than you’d incur from the CD penalty.
In all scenarios, the exact penalty that will apply to your CD matters a great deal. Some banks have mild policies while others impose stiff penalties. You’ll need to do the math on precisely what cashing in early will cost you.