If you redeem a CD before it matures, you will most likely be hit with an early withdrawal penalty equal to some number of months worth of interest. Depending on how long you’ve held the CD and how steep the penalty is, you could lose all or some of the interest you’ve earned. You could lose more than the interest you’ve earned, in which case you would lose some of your principal. To see just how onerous these penalties can be, see http://www.bankrate.com/brm/news/investing/20061208_cd_early_withdrawal_main_a1.asp.

It’s not easy to avoid these penalties, so before buying a CD, make sure you understand them and are pretty certain you can afford to lock up your money for the full term.

One way to avoid early withdrawal penalties is to die or be declared mentally incompetent. Most institutions will waive penalties if your CD is in an IRA or 401(k) and you are older than 59.5.

CDs bought through a deposit broker, called brokered CDs, might not have an early withdrawal penalty. But if you sell them before they mature, you could get more or less than you originally paid, like you would if you sold a bond before it matured.

The silver lining: early withdrawal penalties are tax deductible.