No-penalty CDs: What they are and how they work
Key takeaways
- No-penalty CDs offer fixed rates with the added flexibility to withdraw funds without worrying about the early withdrawal penalties associated with standard CDs.
- No-penalty CDs still come with certain restrictions. You often won’t be able to make additional deposits once you open it, and if you do need to access cash early, you may not be allowed to make a partial withdrawal.
- Some online banks are currently offering no-penalty CDs that can pay approximately 4 percent APY.
If you’ve been thinking about opening a certificate of deposit (CD), the potential for an early withdrawal penalty may be keeping you from clicking the “open account” button. It’s understandable: No one wants to hand over a chunk of money because they wound up needing their money earlier than expected. However, there’s a CD option that can help you rest easy at night and forget about ever paying any of those early withdrawal fees, and it has an appropriate name: It’s called a no-penalty CD.
What is a no-penalty CD?
A no-penalty CD earns interest over a defined period of time, called the term. The term can range from months to years, although some banks and credit unions limit no-penalty CD terms to less than one year.
Regular CDs have terms, typically ranging from three months to five years – though these terms can be shorter or longer. During these terms, you’ll likely incur an early withdrawal penalty if you withdraw your money before the CD matures.
Unlike regular CDs, no-penalty CDs allow early withdrawals without incurring a penalty. Depending on your bank’s withdrawal policies, you might be able to withdraw money from a no-penalty CD as early as seven days after it’s been funded.
The rules on withdrawals and fees should be available at your bank or on its website.
A no-penalty CD will often earn a higher interest rate than a savings account or a money market account.
How no-penalty CDs can improve your finances
A no-penalty CD can help improve your finances by:
- Offering you a rate of return that is possibly higher than a traditional savings account
- Locking in that rate of return for a fixed period of time to help you avoid a lower variable rate if/when rates go down
- Helping you avoid an early withdrawal penalty if you wind up needing your funds before the term is up
Pros and cons of no-penalty CDs
As with all financial products, no-penalty CDs have their pros and cons. Here are some things to take into account:
Pros of a no-penalty CD
- Easy access: The ability to take out money from your CD early without paying a penalty fee is important when you quickly need cash.
- Ability to get higher returns at your discretion: When interest rates rise, a no-penalty CD offers another perk: an opportunity to earn a higher rate by withdrawing your money and putting it in another CD with a higher annual percentage yield (APY).
- Guaranteed rate: CDs pay a fixed interest rate that is often higher than what money market accounts and high-yield savings accounts pay, helping you to build your savings faster.
Cons of a no-penalty CD
- Withdrawal restrictions: You may not be able to make partial withdrawals. If you need to take out money early from a no-penalty CD, the bank may make you withdraw all of your cash and close the account.
- Deposit limits: Like a traditional CD, a no-penalty CD usually doesn’t allow additional deposits after the account is opened.
- Lower rates: No-penalty CD rates tend to be lower than traditional CDs with similar term lengths.
Which banks offer no-penalty CDs?
Although a no-penalty CD has its benefits, it’s not a common product. Few financial institutions offer no-penalty CDs, so it might be tough to find one that suits your needs.
Here are a few banks that offer no-penalty CDs (with APYs as of September 17, 2024).
- Ally Bank: Ally Bank offers an 11-month no-penalty CD that pays a 4 percent APY with no minimum deposit required to open.
- CIT Bank: CIT Bank offers an 11-month no-penalty CD that pays 3.50 percent APY and has a minimum opening deposit of $1,000.
- Marcus by Goldman Sachs: Marcus offers 7-, 11- and 13-month no-penalty CDs, all of which require a $500 minimum deposit and pay a 4.50% APY.
- Synchrony Bank: Synchrony offers an 11-month no-penalty CD that requires no minimum deposit to open, although Synchrony’s offering is a reflection of the tradeoff for the convenience of that “no-penalty” label: It’s currently paying just 0.25% – far less than the 4.80% APY attached to its top-earning traditional CD.
Don’t limit your search to online banks, though. Some local banks and credit unions also offer no-penalty CDs and other CD alternatives that may be even more rewarding that some well-recognized national institutions.
Before getting a no-penalty CD, compare rates and use Bankrate’s CD calculator to determine how much interest you’ll earn during your term.
Bottom line
If you want to grow your savings without sacrificing liquidity, a no-penalty CD can be a good choice.
Another option is a high-yield savings account, which helps you build up your savings while giving you the flexibility to withdraw funds when you need to.
Libby Wells and David McMillin contributed to an update of this story.
