Are CD returns worth the withdrawal restrictions? Experts offer insight

When it comes to good interest-bearing deposit accounts, certificate of deposit (CDs) can be a solid savings vehicle for people who want to park their cash in something with low risk and the potential for high returns. CD interest rates can vary widely, but if you shop around, you can easily find CDs in a wide range of terms offering over 4% APY currently. 

In exchange for those high CD rates, you agree to hold your funds in the account for a set term, which could be anywhere from a few months up to 10 years. If you need to access your funds early, you could get hit with an early withdrawal penalty. 

Given the restrictive CD withdrawal rules, it's important to weigh the potential CD returns along with the risks and understand when it makes sense to use a CD and when it doesn't. We spoke with three experts who share when a certificate of deposit is a good idea, despite the restrictions and when it's not. 

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When CD restrictions are worth it

Here are some scenarios when CD returns are worth it, even with the early withdrawal penalty. 

You're saving for a specific goal 

A major advantage of saving with a CD is that you can choose from a range of CD terms. Whether that's six months to a year, two years or five years, you have the power to choose what works for you. If you have funds for a specific goal down the line, a CD could be a good fit. 

"CDs can also be very helpful for folks who might have a specific expense that's coming due, say in a year, two years, and they don't want to be tempted to touch that money," says Shana Hennigan, chief business officer at Raisin, a platform where consumers can have access to multiple banks and credit unions and their deposit products all in one place. 

If you have all of your savings pooled together, it can be very easy to dip into it and lose focus on your goals. A CD is a great tool for stashing funds that serve a bigger purpose. 

"Whether it's a wedding, vacation, car, home repairs, you know, different types of CDs would be great for that," says Kelley Leix, client deposit services manager at Merchants Bank.

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The CD withdrawal penalty is only interest 

When you save using a certificate of deposit, you commit to a CD term and agree not to touch your money. If something happens and you need that money, the terms of your account can hit you with a CD early withdrawal penalty. 

While a minimum penalty is in place, there isn't a maximum amount that can be charged. It's at the discretion of your financial institution. 

"The first thing I would advise is make sure you find out exactly what the penalties are. For instance, if you're only losing the interest you've earned, then I would say that that's good…What you want to see in a certificate is that the financial institution cannot take your principal. So I would look for penalties that are only interest earned up to a certain number of days of interest," says Carma Peters, president and CEO at Michigan Legacy Credit Union. 

When CD restrictions may not be worth it 

The restrictions with CDs mean less accessibility and flexibility. While the CD returns could be worth the restrictions in some cases, here are some situations where it may not be worth the trouble. 

If you don't have an emergency fund 

A certificate of deposit is a great savings vehicle in addition to a high-yield savings account. If you don't have an emergency fund set up yet, locking away your money for a specific term with a CD isn't recommended. 

"If you know that you need liquidity, you are looking to put together an emergency fund, something where you know you are going to need access to your cash immediately, a CD is likely not the appropriate choice for you," says Hennigan.

If you need the funds soon 

A CD might not be the best vehicle if you're on the fence about whether you may or may not need the funds soon. 

"If you know you're going to need the money, then I would either look for a shorter term certificate or maybe a different vehicle with a higher rate to get a return if you know you're going to need that money in the near future," says Peters.

How to find the best CDs 

After you compare potential CD returns with the withdrawal restrictions, you can make a sound financial decision on whether it's worth it or not. If you decide to move forward, here is how to find the best CDs. 

• Compare CD APYs. If you want to know where to buy a CD, you can start by checking CD interest rates with your financial institutions. Be aware that online banks and local credit unions may offer more competitive rates. Leix also notes that some banks offer different rates based on tiered amounts, but not all banks do this. 
• Look at minimum deposits. Most banks with CDs require a minimum deposit, which could range from $500 to $2,500. Though some may have no minimums or even higher ones. 
• Review CD terms. Each financial institution has different offerings. CD terms can vary from several months to several years and in between. 
• Confirm the early withdrawal penalty. Before you open a CD account, confirm the early withdrawal penalty so you know what you're getting into. Any CD withdrawals before the term can trigger a penalty. 

Peters suggests making sure the financial institution you open a CD with is insured. The Federal Deposit Insurance Corporation is the entity that insures many bank deposits, while the National Credit Union Administration (NCUA) insures credit union deposits — up to $250,000 per depositor, per account. 

The bottom line 

Putting money away in a certificate of deposit can be a smart idea if you have strategic goals and an emergency fund in place. Due to the CD penalty, savers must think twice before agreeing to a specific CD term. If you do, understand the potential consequences and know whether you plan to roll over your CD once it matures or cash out.