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MoneyWatch: Managing Your Money

How to avoid CD early withdrawal penalties

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By Kelly Ernst

/ CBS News

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Don't let early withdrawal penalties chip away at your CD earnings. Getty Images/iStockphoto

A certificate of deposit (CD) is a great tool for savers who want to earn a higher interest rate than typical savings accounts offer. It's a low-risk investment, but it does come with a catch: If you need to access your funds from the CD before it matures, you may have to pay an early withdrawal penalty.

This penalty is usually a percentage of the interest you've earned to date, but it may also be a flat rate. Penalties can range from a few months of interest to the entire interest you've earned, depending on the bank's policy.

These penalties can eat into your earnings, making your investment significantly less profitable. Thankfully, there are ways you can avoid early withdrawal penalties. 

First, find out how much you could be earning now — .

How to avoid CD early withdrawal penalties

Safeguard your CD earnings from early withdrawal fees with these strategies.

Choose a shorter term

CDs come in terms typically ranging from three months to five years. To avoid early withdrawal penalties, choose a CD term that aligns with your financial goals and anticipated needs.

Set a realistic timeline for your investment and only invest money you're confident you won't need before the CD matures. You can always renew your CD when the term is up to take advantage of any interest rate increases.

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Opt for a no-penalty CD

Some banks offer no-penalty CDs that allow early withdrawals at no charge. Although their interest rates may not be as high as traditional CDs, no-penalty CDs give you the flexibility to withdraw funds if needed without incurring fees. Most only let you withdraw your full CD amount, but a select few allow several partial withdrawals through the CD's term.

Create a CD ladder

Another way to avoid early withdrawal penalties is by building a CD ladder. When you ladder your CDs, you open several CDs with staggered maturity dates. This ensures you'll have regular access to funds while still enjoying the higher interest rates that come with longer-term CDs.

Once one CD matures, you can cash it out or reinvest the money in a new CD. This can be especially beneficial if CD rates have gone up since you opened your last CD.

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Take advantage of partial withdrawals

Some banks allow you to make partial withdrawals from your CD without incurring a penalty. This means you can withdraw a portion of your funds while leaving the rest to keep accruing interest until the maturity date. For instance, you may be able to withdraw the interest you've accumulated as long as you don't touch the principal.

Be sure to carefully read the terms and conditions for any CD you're considering so you know what your options are.

The bottom line

Investing in a CD is a great way to earn higher interest rates while keeping your money secure. However, it's important to know how to avoid early withdrawal penalties to keep fees from chipping away at your earnings.

By implementing strategies to avoid these fees — such as choosing a shorter term, considering no-penalty CDs and creating a CD ladder — you can earn the most from your investment and reap the full benefits of having a CD.

Find the right CD for you by .

Edited by Matt Richardson

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