What Is A No-Penalty CD?

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No-penalty CDs can offer the best of both worlds between flexibly savings accounts and high yield certificates of deposit.

Traditional CDs can be great long-term savings tools, but locking away any substantial amount of cash for an extended period of time, especially while interest rates are steadily increasing, could mean losing out on better rates before the term ends. On the other hand, while high-yield savings accounts offer easy access, they aren’t always going to offer the best returns.

But a no-penalty CD is kind of a hybrid. These liquid CDs offer fixed, competitive rates along with the reassurance of easy access to your money, even if you withdraw early.

“They’re a nice middle ground option for people,” says Adam Stockton, director of consumer pricing at Novantas, a consulting and research firm that works with financial institutions. “Everyone has to make the trade-off of how much they value the rate versus the access to their funds, but it can be a best of both worlds option in some cases.”

No-Penalty CDs Explained

No-penalty CDs operate similarly to regular certificates of deposit—you agree to a term and lock in an interest rate upfront, then deposit your money and leave it until the CD reaches maturity. You won’t be able to add money to the account over its term; instead, your initial deposit is the principal that interest builds upon. 

But unlike traditional CDs, you’ll forgo any penalties for early withdrawal if you need to take out your cash before your CD reaches maturity. Typically, penalties for withdrawing from a CD early may include a percentage of interest earnings, your full interest earned up to that point, or even part of your principal. 

Depending on your bank’s specific rules, no-penalty CDs may allow a one-time withdrawal of your money (essentially closing your account) or, more rarely, partial withdrawals throughout the term. Be mindful of any waiting period your bank imposes, though; you may have to wait a few weeks after account opening before you can withdraw penalty-free.

So what’s the catch?

In exchange for more liquidity, you will likely give up some potential interest earnings with a no-penalty CD, compared to a long-term traditional CD. Today, no-penalty CD rates are abou the same as you’ll find on shorter-term CDs or high-yield savings accounts but may still be lower than what you can get from longer-term CDs.  

No-penalty CD term length options are also more limited. No-penalty CD terms typically range from about 6 months to 12 or 14 months. 

Pros of No-Penalty CDs

  • Fixed interest: In times when interest rates are high, a no-penalty CD allows you to lock in a great rate and safeguard your interest if rates fall over your term.
  • Liquidity: Maintain the option to withdraw your cash at any point throughout your term. Check with your specific bank about one-time withdrawal limits or partial withdrawal allowances. If rates do begin to rise before your CD matures, you can take advantage of the opportunity to withdraw early and put it in a new account earning higher interest.
  • Security: Like other deposit products, no-penalty CDs are insured by the FDIC, up to $250,000.

Cons of No-Penalty CDs

  • Fixed interest: In a rising rate environment, securing a fixed interest rate may cause you to lose out on potential interest earned. If rates rise throughout your CD’s term, you could miss out on higher interest if you keep your money in the CD.
  • Lower APY than other CDs: You may give up a higher APY by choosing a no-penalty CD over a traditional, less-liquid CD.
  • Initial deposit: Like other types of CDs, no-penalty CDs require you to deposit your principal at account opening. If you’re looking for an account that you can contribute to regularly while earning interest, consider a high-yield savings or money market account.
  • Minimum balance: Double check the minimum required balance to earn the advertised APY, as some no-penalty CD minimums can run steep.

Should You Open a No-Penalty CD or High-Yield Savings Account?

Liquidity is a great perk of no-penalty CDs, but if accessibility is your biggest need, you may want to consider a high-yield savings account instead.

And if you primarily use savings to maintain an emergency fund for unexpected expenses, you may see fewer incentives for CDs in general.

Anjali Jariwala, CFP, founder of FIT Advisors in Redondo Beach, California, says she typically doesn’t recommend clients tie up money in a traditional CD, though she does still see no-penalty CDs as a viable option. “Before, there was a bigger differential with the no-penalty CD and the high-yield savings rate, but if they’re the same, I don’t see the difference in putting it in one versus the other.”

Choose A Savings Vehicle That Serves Your Needs

Consider what purpose you want the money to serve before opening any account.

For instance, if you’re looking for somewhere to keep an emergency fund to which you’ll contribute regularly, a high-yield savings or money market account is going to give you the most efficient and direct access to your money when an emergency arises. 

If you want an account to stow away money you have saved for going back to grad school in five years, however, a no-penalty CD can be a great set-it-and-forget-it savings tool that ensures liquidity if you decide to enroll sooner.

First determine your need, and it will be easier to decide on the right product to fulfill that need.

No-Penalty CDs and Rising Interest Rates

If you’re looking to score a high interest rate on your savings, it’s important to consider how the overall interest rate environment has an affect on the account type you choose — as well as how rising rates affect no-penalty CDs and savings accounts differently.

For example, Marcus by Goldman Sachs and Ally Bank, which consistently offer among the highest interest available on the market, currently have nearly identical APYs on both their no-penalty CDs and high-yield savings accounts.

As rates rise, it’s possible no-penalty CDs may surpass savings rates — as they did when rates were last on the rise a few years ago — but today they remain very similar, though still increasing. Consider the differences in liquidity and the goals you have for your savings before choosing which account is best.

Bottom Line

If you can score a competitive interest rate, no-penalty CDs are a great compromise between flexible high-yield savings or money market accounts and traditional CDs with fixed interest. 

But given today’s rate environment, you may find interest on savings accounts to be just as good, with even more liquidity in case of emergency. The most important thing is to do your research before opening any new account to find the right product that fits with your timeline, savings goal, and access needs.