When should you cash in your CDs? Here's what experts say

Certificates of deposit (CD) accounts are a popular investment vehicle, providing the safety of a savings account with increased returns. They require you to lock up your money for a certain period — this is known as the term. During that time, you'll earn a fixed interest rate with the option to withdraw your funds when the CD matures.

CDs are unique from other savings and investment tools because they require you to lock up your money, often for anywhere from months to years. However, they can be an excellent option if you're saving for a specific financial goal in the future.

When your CD matures, you'll have to decide whether to roll it over, cash it out or shop around for a new CD. We spoke with three financial experts to see which option they recommend in today's economy. 

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When should you cash in your CDs?

When your CD reaches maturity, you have three primary options:

• Let your CD roll over. If you don't withdraw your CD funds within a certain period, known as the grace period, it will automatically renew for the same term. However, it will renew at today's interest rates, not your original rate.
• Move your money to a different CD. You can shop around to see if you can get a better rate at a different financial institution. Some banks and credit unions may offer promotional rates for new customers.
• Withdraw your funds completely. You can transfer the money into a savings account, investment account, or another type of account. Or you can take it out as cash. Just make sure to withdraw the funds before the grace period between terms ends.

According to financial experts, the smart option is the one that most aligns with your personal financial goals. Whether you're choosing a CD for the first time or are deciding whether to renew yours, consider what you plan to use the money for and when you'll need it.

"It does make sense, if you are saving for a particular purpose, such as a home down payment, to make sure your CD durations match up with when you expect to need the money," says Bobbi Rebell, a CFP at personal finance expert at CardRates.com.

For example, if you know you want to buy a home in roughly six to nine months, it doesn't make sense to put your money in a 12-month CD. Instead, a 6-month CD probably makes more sense.

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Consider current interest rates

The current rate climate can help you decide whether to renew your CD when it matures and at what term to renew it.

According to Kimberly Flewelling, a national securities expert at A.D. Banker, rates tend to move in the same direction for a while based on actions taken by the Federal Reserve's Federal Open Market Committee (FOMC). Once they start moving in one direction, they'll typically continue to do so before eventually flattening out.

"At the beginning of that period, as the rates are climbing, individuals should seek shorter-term maturities," says Flewelling. "Once the interest rates appear to stabilize, it would be recommended to begin to shift to longer-term maturities to lock in the highest rates possible. Once the interest rates begin to fall, they will typically continue to fall."

Avoid early withdrawals, when possible

CDs have set terms, and you're generally required to lock up your money for the entire term. If you withdraw your money before the CD reaches maturity, you'll likely be on the hook for an early withdrawal penalty, which is usually based on your CD's interest rate and term.

"Early withdrawals should only be a last resort and for an emergency where you can't access other funds," says Rebell. 

For example, you might pull money from your CD early if you're facing job loss or another financial emergency and don't have sufficient money in your emergency fund to cover the entire thing. In this case, Rebell recommends asking your bank if they offer a hardship withdrawal, which may allow them to waive these penalties.

Another reason you might withdraw your funds early, according to Kelsey Wilson, a CFP and the founder and CEO of the wealth management firm BlackLines Financial, is if interest rates increase and you can earn enough additional interest to make it worth paying the fee.

"So, if interest rates bump up and the penalty that they're going to end up paying is going to be less than the money that they would end up receiving by moving into a new CD," says Wilson.

Consider a CD ladder

If you're concerned about choosing the right CD term and about having access to your money when you need it, a strategy called a CD ladder may be a good compromise.

"Maybe you might have a CD that matures in three months, six months, and 12 months, so that way you kind of cover the whole entire basis of interest rates," says Wilson. "So, if interest rates drop, then you have something in there that's long-term. If interest rates go up, then you have some that are going to mature that you can reinvest back into within three months."

Another key advantage of a CD ladder is that it ensures some of your money will always be available soon. If one CD matures and you need the funds for a different purpose, you can simply withdraw your money instead of letting the CD renew.

The bottom line

CDs are more rigid than many savings and investment vehicles because they require you to lock up your money. However, given the wide variety of terms and interest rates, it's easy to customize your CD strategy in a way that fits your overall financial goals and plan. If you want to use CDs as a part of your savings strategy but aren't sure of the right approach, consider speaking with a financial advisor who can recommend a solid strategy.