Here's What Happens When You Need to Take a Withdrawal From a CD

There's a reason some savers are tempted to put money into a certificate of deposit, or CD, rather than stick to a regular savings account. With a CD, you commit to keeping your money at the same bank for a preset period of time. In exchange, you'll generally snag a higher rate on your CD than you will on a savings account.

Also, the rate on a regular savings account can change on a whim. Yours might start out high, only to drop continuously.

With a CD, the rate you lock in is the rate you get to earn throughout your CD's term. So if you sign a 24-month CD at 4.5%, for example, that's the rate of interest you're guaranteed for two full years.

But there's a drawback to keeping money in a CD, and it's that you forgo some flexibility. And that could become a problem if you need to access your cash in a pinch.

When you need to take money out of a CD

When you have cash in a regular savings account, you can take withdrawals whenever you want, and without penalty. But CDs don't work that way.

CDs generally do not allow you to withdraw a portion of your balance. Rather, if you need money and don't have another way to get it, you'll have to cash out your CD in its entirety.

To put it another way, let's say you need $500 to cover a car repair bill and you have a $5,000 CD. You can't simply remove one-tenth of your balance and leave the remaining $4,500 locked up. Instead, you'll generally be forced to cash out your $5,000 CD entirely. And doing so will usually result in a penalty.

The amount you'll be penalized will depend on your bank. There's no single universal rule banks have to follow when it comes to early CD cash-out penalties.

But as an example, here are the penalties Capital One imposes if you cash out a CD before it matures:

• Three months of interest for a 12-month CD or shorter
• Six months of interest for a CD with a term that's greater than 12 months

So let's say you bank with Capital One and cash out a 12-month CD prematurely. If that CD was paying 4.5% interest on $5,000, it means you're giving up about $56.

Be careful when opening a CD

You may be tempted to open a CD so you can snag a higher interest rate on your money, and one that's guaranteed. But before you do, make absolutely sure you have other funds set aside for emergencies, and that you don't expect to need the money you're putting into a CD anytime soon.

Another good bet may be to do a CD ladder instead of putting all of your cash into a single CD with a single maturity date. Let's say you have $5,000 to put into a CD. Instead of pumping all of it into the same one-year CD, you may want to put $1,250 into a one-year CD now, wait a few months, put another $1,250 into a different 12-month CD, and so forth. This way, your money frees up at different intervals, which could help you avoid having to cash out a CD early and get penalized in the process.