When Should You Cash In Your CDs Early? Here's What You Need to Know

Certificates of deposit (CDs) are a safe way to grow your savings, but what happens when you need that cash before your CD reaches maturity? While letting a CD reach full term is often the best move, there are times when cashing out early makes sense. Here's what you need to know before making a decision.

Understanding CD maturity and penalties

CDs have fixed terms -- ranging from a few months to several years -- and a guaranteed interest rate. But if you withdraw your money before maturity, you'll likely face an early withdrawal penalty, which can eat into your earnings. The penalty varies by bank and term length but often equals several months' worth of interest.

That's why the first question to ask yourself is: Is the reason for cashing out worth the penalty?

When it makes sense to cash out early

Sometimes, breaking a CD early is the best financial decision. Here are a few scenarios where it might be worth considering.

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1. You need the money for an emergency

If you don't have enough money in your emergency fund and face an urgent expense -- a medical bill, car repair, or job loss -- cashing in a CD might be better than racking up high-interest debt. The key is comparing the penalty to the cost of borrowing elsewhere.

2. Interest rates have increased

If you locked in a CD when rates were low and they've since jumped significantly, cashing out to reinvest in a higher-yield CD could make sense. But be sure to crunch the numbers and make sure the extra interest you earn will outweigh the penalty.

3. You have better investment opportunities

Maybe you found a much better place for your money -- such as a high-yield savings account (HYSA), a better CD rate, or even an investment opportunity with a higher return. If the math works in your favor, breaking your CD early could be worth it.

What about a high-yield savings account?

Other than the scenarios listed above, there aren't many times when cashing in a CD early makes sense. But if you want to earn a high rate on your cash and be able to access it whenever you want, you're probably looking for a high-yield savings account.

HYSAs offer interest rates as high as 10 times the national average savings account rate, according to the FDIC. Along with rates near or above 4.00%, you don't get locked into a term and can access your cash when you need it.

If keeping your cash flexible without the time commitment of months or years sounds like the best option for you, be sure to check out our list of the best high-yield savings accounts now.

Alternatives to cashing out early

If you're tempted to cash in a CD but want to avoid penalties, consider these options:

1. CD laddering

If your current CD is locking up too much of your cash, consider a CD laddering strategy for future investments. This involves staggering multiple CDs with different maturity dates, giving you more flexibility.

2. Partial withdrawals

Some banks allow partial withdrawals from CDs with lower penalties. Check with your financial institution to see if this is an option.

3. Look for no-penalty CDs

If flexibility is a priority, no-penalty CDs let you withdraw your funds early without a fee. They usually offer lower interest rates than traditional CDs but provide peace of mind if you think you'll need access to your cash.

With the Fed's decision to keep rates steady for the time being, CD rates remain competitive. Check out our list of some of the best CD rates available now.

The bottom line

Deciding whether to cash in your CD early comes down to weighing the penalty against your financial needs. If you're facing an emergency, a better interest rate, or a smart investment opportunity, withdrawing early might be the right move. Otherwise, holding out until maturity is usually the best bet.