By Sabrina Karl

For anyone wanting to sock away savings untouched for a few years, long-term CDs can be a smart move since they pay the highest guaranteed interest rates. But since these certificates keep your money locked up for a relatively long period (generally 4 to 7 years), some extra caution is required to make a smart CD choice.

All CD banks and credit unions stipulate an “early withdrawal policy” in their terms, informing the saver before they open a certificate what penalty they’ll incur should they cash out before the CD matures. The penalty is generally a forfeiture of interest the bank would have paid you (it does not trigger any tax penalties by the IRS).

Savvy savers pay attention to the early withdrawal policy because the penalties vary widely. Some banks charge as little as 3 to 6 months’ interest, while others take back as much as 2 years’ worth. Even worse, some charge a flat fee or percentage, leaving you at risk of losing some of your principal – a scenario to be avoided at all costs.

If you want to keep your options open to cash out early, either because you might need the money for something else or because the Fed has caused rates of new CDs to rise, you’ll want to stick to certificates with a penalty of 6 months of less. If instead you’re tempted by a CD with a chart-topping rate, but also a hefty early withdrawal penalty, you’ll want to avoid it unless you have very high confidence you can hold the certificate to maturity.

Incurring an early withdrawal penalty is not itself a mistake. Cashing out prematurely can be your best move for a number of reasons. The mistake is not knowing beforehand what a CD’s penalty will be, leaving you prone to a losing proposition.