Certificates of deposit (CDs) can be a good option for people who are looking to park their cash for a short period of time and potentially earn more than a general savings account.
The downside of a traditional CD is that your money will be tied up until the CD matures (which could be several months to five years). If you need your money sooner, you will typically pay an early withdrawal penalty.
A no-penalty CD is similar to a traditional CD, except that there is no fee charged for making a withdrawal before the CD matures.
The trade-off is that no penalty CDs aren’t as easy to find, and may offer a lower interest rate than traditional CDs.
Read on to find out if a no-penalty CD might be a good option for your savings goals, plus how these CDs compare to other high-interest savings options.
No Penalty CDs Explained
A no-penalty CD is a type of deposit account that’s structured like a traditional CD in that money is placed into the account for a set period of time—usually around a year.
During that period, interest accrues, often at a higher rate than a standard savings account.
That rate is locked in until the end of the CD term, also known as its maturity date.
Unlike traditional CDs, there is no fee or loss of earned interest if the money is withdrawn before the account matures.
Funds usually need to be kept in the account for at least a week before they can be withdrawn. But as long as that short milestone is met, a no-penalty CD is a very flexible option.
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No Penalty CDs versus Traditional CDs
Opening one or more CDs can be an effective way to house your savings. It’s one of several ways to earn more interest than you might in a traditional savings account.
But before deciding which CD to choose, it helps to understand the intricacies involved in each type.
With a traditional CD, money can’t be withdrawn from that account without incurring a penalty fee.
Early withdrawal penalties for a CD vary, depending on the individual financial institution, but the penalty typically involves losing a certain number of days or months’ worth of interest.
The length of time varies by each bank or credit union, but depending on how early you withdraw your funds from a CD, you could possibly lose some of the principal or initial deposit.
For example, a bank may charge a CD early withdrawal penalty as 120 days (or four months) of interest payments.
If the CD has only been open for three months, you’d not only lose the account’s accumulated interest but an additional month of daily interest would also be deducted before the cash could be withdrawn.
Generally, the farther away you are from the CD’s maturity date, the higher the penalty will be.
That’s why long-term CDs aren’t typically recommended to house short-term emergency savings. When that surprise expense pops up, it could end up costing money to access the funds.
Of course, every bank has different terms and conditions. Before opening any account, it’s important to understand all of the details to avoid getting caught off guard with unexpected charges.
Pros and Cons of a No Penalty CD
All savings accounts come with both risks and benefits. A no-penalty CD may not be right for everyone, so let’s dive into some of the pros and cons.
Like all CDs, no penalty CDs come with a fixed interest rate until it matures. No matter what happens to rates within the market, that original APY is guaranteed.
A high-yield savings account, on the other hand, can drop the rate at any time based on market conditions.
Another benefit of a no-penalty CD is that cash continues to be kept liquid.
Whether it’s intended for an emergency fund, a down payment on a house, or to pay for a wedding, this type of CD can be a useful tool that balances both flexibility and setting money aside for a financial goal with a specific timeline.
On the flip side, this type of account may offer a lower interest rate compared to traditional CDs.
While no penalty CDs may pay a higher APY than a traditional bank savings account, these CDs may not pay as high an APY as some online savings accounts.
Also keep in mind that although a no-penalty CD does allow you to access funds, it’s usually a one-time event.
Banks typically require all of the funds in the no-penalty CD to be withdrawn that one time and will then close the account, which means the rate lock is out the window.
Another limitation of a no-penalty CD (as well as a traditional CD) is that once you invest, you can’t add to it. You can, however, open another no penalty or traditional CD.
Finding a No Penalty CD
No penalty CDs aren’t as common as their traditional counterparts. But they can be found through several online banks, making it convenient to open, fund, and manage the account.
Some local banks and credit unions may also offer this type of CD.
Shopping for a no-penalty CD is the same as evaluating any other financial product.
In addition to comparing interest rates, it’s also a good idea to look for account minimums, as well as the minimum time after depositing your money before withdrawals are allowed (typically around a week, but this can vary).
Some banks also offer tiered interest rates for no deposit CDs, with higher rates offered for higher deposit amounts.
Whatever no penalty CD you are considering, it’s smart to read the fine print.
Some banks may advertise a “no penalty CD” but are really offering something quite different, such as a 12-month CD that only allows you to withdraw your money penalty-free in the event of an emergency, such as a job loss.
Alternative Options
A no-penalty CD can be a great way to earn higher interest on your savings than you would get in a standard savings account, yet still, maintain flexibility.
It’s not the only option, however. Here are some others to consider.
High-yield checking account
An interest-bearing checking account helps earn some extra cash on the money used on a day-to-day basis.
It’s one of the most flexible options because there are no transaction limits and both a checkbook and debit card can be linked to the account.
However, some banks charge a monthly account fee or require a certain minimum balance in order to qualify for this extra incentive. And interest rates on these accounts tend to be lower than other short-term savings options.
High-yield savings account
High-yield savings accounts, which are offered by many banks and credit unions, typically come with a higher interest rate than a checking account or traditional savings account.
It’s easy to transfer money between accounts, but withdrawals may be limited to six per month and there may be fees for dropping below a minimum balance.
High-yield savings accounts are also offered by online banks. Because these banks only operate online (and, as a result, tend to have lower operating costs), online savings accounts often offer higher interest rates than high-yield savings options at brick-and-mortar banks.
Online savings accounts typically allow you to deposit checks and move money back and forth between accounts but may have limits on how many withdrawals you can make per month.
Money market account
A money market account (MMA) is a low-risk investment account (deposits may be placed in government bonds, CDs, or commercial paper) that tends to offer higher interest rates than a traditional savings account.
Depending on what’s happening in the market overall, an MMA may be in line with that of an online-only bank account.
Money market accounts often allow you to write checks and may also come with a debit card, but there may be limitations on how often you can write a check or withdraw your money.
These accounts may also require a high minimum balance to avoid monthly fees, especially for higher yield tiers.
Cash management account
A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union.
CMAs are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.
Generally, when you put money into a CMA, it earns money (often through low-risk investing that is done automatically), while you can also access it for your daily spending.
This allows CMAs to function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.
Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum.
For people who are interested in streamlining their accounts, as well as saving for a short-term goal, a CMA can be a good option.
The Takeaway
If you’re looking for a higher return on your savings than you’re getting at the bank, but still want some liquidity, a no-penalty CD could be the right choice for your financial goals.
These CDs may offer lower interest rates, however, than you would get with a traditional CD. So it’s a good idea to shop around for rates to see which bank is offering the best deal.
Also keep in mind that with any type of CD, when you do withdraw your money, you will likely need to take it all at once, rather than a little here and a little there.
Other ways to help your savings grow, yet still keep it liquid, include a high-yield checking or savings account, an online savings account, a money market account, and a cash management account.
Before you commit to any savings vehicle, consider the purpose of your savings, when (and how often) you will need to access it, as well as what the terms, deposit and balance minimums, and fees will be.
Looking to grow your savings, but still, have access to it at any time? You may want to consider opening a checking and savings account with SoFi.
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