Guide to Liquid Certificates of Deposit (CDs)

By Paulina Likos · May 02, 2022 · 9 minute read

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Guide to Liquid Certificates of Deposit (CDs)

If you’re looking for a safe but accessible way to grow your money, a liquid certificate of deposit (CD) could be a good option. Managing your money is all about managing risk, and a liquid CD can allow investors to secure interest with very low risk. Granted, returns from liquid CDs may not be as competitive as stock market investments. However, when you’re committing to a liquid CD, you’ll have a fixed, guaranteed payment when the account matures.

If you are the type of investor who is not in the financial position to take on a potential loss, putting your money in a liquid CD for a period may be a suitable option. The best part is, you can access those funds anytime and withdraw money from a liquid CD without paying fees. Here, we’ll take a closer look at liquid CDs and review:

•   What a liquid CD is

•   How to withdraw money from a liquid CD

•   The pros and cons of liquid CDs

•   Alternatives to liquid CDs

What Is a Liquid Certificate of Deposit?

Before you think about investing in a CD, let’s get the terminology clear. A certificate of deposit, or CD, is usually a savings vehicle that gives you a bit of interest with virtually no risk, provided you keep the money in place for a certain term. If, however, you withdraw funds before the CD matures (or reaches the end of its term), you are usually penalized. You will likely lose some or all of the interest earned and perhaps even a bit of the principal.

A liquid certificate of deposit, on the other hand, gives you flexibility. It allows account holders to withdraw money from their account prior to the maturity date without incurring penalties. (You may also hear it referred to as a no-penalty CD, in fact.) This means you can access funds in the CD should you need them, which can provide peace of mind and some real-life help. It’s worth noting, though, that you will probably pay for this privilege: The rates for liquid CDs tend to be lower than other kinds of CDs.

Understanding a Liquid CD

You may be wondering, “What are liquid assets?” Let’s dive in a little deeper. In the realm of finance, the concept of “liquid” means that an asset can quickly be converted to cash. A liquid CD is a time-bound deposit account where you can earn interest for a specific period of time. Compared to traditional CD’s however, liquid CDs will not charge you early withdrawal penalties. This means you can easily liquidate (turn into cash) your CD without taking a hit in terms of its value.

Yes, there’s a “but” to this proposition: Liquid CDs typically pay less than traditional CDs. Depending on which financial institution you go to, these products can offer various terms, either as little as a few months or up to several years or longer. Your fixed interest rate will vary according to the length of the term you’ve chosen. Typically, the longer you hold your money in the liquid CD, the higher the rate of return. The great thing about CD rates is that they are locked in during the full term. This means even if interest rates decrease, your rate would not change. Some financial institutions may require a minimum deposit for these CDs, and they can be significantly higher than traditional CDs; some are at the $10,000 and up level. What’s more, the minimum deposit may go up if you are seeking a higher interest rate. , while others don’t have a minimum deposit requirement.

How Do You Withdraw Money From a Liquid CD?

If you have decided that you need to withdraw from your liquid CD, you need to notify your bank. You will likely have to wait about a week after opening the liquid CD before you can start withdrawing. However, it’s not as quick as withdrawing funds from a checking or savings account; your financial institution might require anywhere from a week to a month to process the transaction. Do check on timing in advance. Also, before you open the account, find out whether you will have to withdraw a certain percentage at a time or whether you need to remove all funds from the account. This can vary depending on the specific account you open.

Liquid CD: Real World Example

Once you have decided a no-penalty CD is right for you, you will need to go to a bank or credit union that offers this account. Once you’ve opened an account, you have to fund it. If you invested $10,000 in a liquid CD with a three-year at a rate of 0.50%, at the end of the three-year period with interest compounded monthly, you will have a total balance of about $10,152.

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Pros of a Liquid CD

When evaluating liquid CDs, it’s worthwhile to review the benefits of these accounts. Some of the key upsides are:

•   Liquidity. One of the key selling features of liquid CDs is the ability to access and withdraw your funds prior to the term’s end. Perhaps you’re having an emergency that requires cash, or you decide to move around your money to better meet your financial goals.

•   No penalties. If you dip into the account before it matures, you won’t be assessed a fee.

•   Security. Liquid CDs are safe investments. These accounts are federally insured, so you know your money is protected when you open a liquid CD with a bank or credit union. This is one of the reasons why liquid CDs are considered low-risk investments. Even if a bank falters, your money is still safe.

•   Guaranteed returns. When you start a liquid CD account, you usually know the interest rate upfront. It may not be stratospheric, but it’s a sure thing.

Cons of a Liquid CD

Now that we’ve explored the good things about a liquid CD, we need to give equal time to the potential downsides:

•   Lower rate of return. The interest rates are significantly lower compared to certificate of deposit rates.

•   Withdrawal rules. Yes, these accounts are more accessible, but after your deposit has been in place for a week, your withdrawal guidelines may be quite specific. For instance, you may have to remove all your funds if you want to make a withdrawal, or the amount might be limited to a certain percentage that doesn’t suit your needs. Check before starting a liquid CD investment.

•   Tax implications. Earnings on your liquid CD will be taxed at your federal rate, which is something to keep in mind as that will take your return down a notch.

Alternatives to a Liquid CD

If the idea of a liquid CD doesn’t sound like an appealing low-risk investment option, there are alternatives to also consider.

Traditional CDs

Traditional certificates of deposit require you to stow your money away for a certain period of time. In exchange, you receive a return at the end of that period. The catch is, you are not able to withdraw your funds during this holding period. If you have a financial emergency, for example, and need the money from your CD, you will receive penalties for withdrawing your cash before the period of maturity. However, this might be a gamble you are willing to take, especially if you have a nice, healthy emergency fund set aside. You’ll earn a better rate of return than with a liquid CD.


CD laddering usually involves opening CDs of different term lengths. This strategy allows you to invest long-term CDs which provide higher rates of return, while having the ability to access your funds through a shorter-term CD.

Money Market Account

Another CD alternative is a money market account, which is similar to a savings account with some added benefits. Money market accounts typically require minimum balances and offer rates comparable to savings accounts that can change over time. While the rates may be lower than a CD, money market accounts typically allow you to withdraw and transfer your money six times per month or more.

Emergency Fund

An emergency fund, or a rainy-day fund, is a savings account that should only be used in times of financial emergencies or unexpected expenses. Depending on your financial position, you can have an emergency fund in a regular savings account, money market account, CD, or liquid CD. It depends on how much you plan to access your emergency fund and how much interest you want to earn in the account.

High-Yield Savings Account

A high-yield savings account can offer a competitive rate of interest, depending on the financial institution offering it (online banks tend to pay more than bricks and mortar ones). And you’ll have more liquidity than a CD because you can deposit and withdraw from the account more frequently, though the specifics may vary with each bank. So if you want easy access to your funds, a high-yield bank account may be a good option.

The Takeaway

Liquid CDs are a financial product that offers the safety and guaranteed return of a traditional CD with the bonus of not being penalized if you make an early withdrawal. For those who are comfortable locking their money into a CD but worry an emergency or other need might pop up, this accessibility can be very attractive. Worth noting: Expect lower interest rates from a liquid CD than a standard one, which may or may not sync with your financial goals.

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Are CDs liquid investments?

Traditional CDs are not liquid investments. This means, funds held in a CD cannot be accessed until the account term is reached. If you need to withdraw money from your CD prior to its maturity date, you will have to pay a penalty. A liquid CD, however, offers flexibility to withdraw money from your account prior to its term date without the usual fees.

What is a non-penalty CD?

A non-penalty CD, also known as a liquid CD, is a savings account that offers interest on your money. However, the rate is usually somewhat lower than the rate for a typical CD (the kind with penalties). The longer the term you choose for your liquid CD, the more you usually can earn.

How much is the penalty for early withdrawal from a CD?

Each financial institution has its own way of calculating this, but it usually involves losing some of all of the interest you have accrued. If your CD term is two years and you withdraw funds early from a traditional CD, the fee could be two months’ worth of interest or six months’ worth, according to a recent search. Your bank might be more or less than these figures. If you have a liquid or no-penalty CD, you will of course avoid these fees.

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