Should I Open a No-Penalty CD?

Using a certificate of deposit, or CD, to grow your savings can be a smart way to receive a guaranteed interest rate during the CD's term. However, one drawback to a traditional CD is that you can’t access the funds during that term without getting a steep penalty.

A no-penalty CD, however, provides the guaranteed return of a traditional CD along with the flexibility to access some or all of your funds during the CD term without a penalty. This type of CD could be a welcome addition to your financial plan if you want to grow your savings faster than you could with a standard savings account but think you may need the cash before the term ends.

Below, we’ll discuss what a no-penalty CD is, how it works, and if opening one is the right move for you.

Key takeaways

• No-penalty CDs provide a guaranteed interest rate for the term of the CD.
• Traditional CDs generally have higher APYs than no-penalty CDs.
• Banks offering no-penalty CDs have specific withdrawal rules.
• No-penalty CDs are generally FDIC or NCUA insured.
• No-penalty CDs typically have minimum deposit requirements.

What is a no-penalty CD?

A no-penalty certificate of deposit (CD) is like a traditional CD, but it allows you to withdraw your money without penalty after a specific time. These accounts are sometimes called liquid, flexible, or flex CDs and can be an excellent way to earn guaranteed interest on money you won’t need immediate access to.

However, they typically don’t earn as high of an annual percentage yield (APY) as a traditional CD (although competitive rates are available). While liquid CDs allow you to access your funds during the CD term, each bank has specific rules about when and how you can access your money.

How does it work?

Like regular CDs, flexible CDs provide a fixed interest rate over a defined period, which is called the term of the CD. The term can range from a few months to a few years, although no-penalty CDs tend to have shorter terms, ranging from seven to 15 months. Like traditional CDs, most no-penalty CDs require a minimum opening deposit, and you typically can’t add additional funds during the CD term.

One of the main drawbacks of a traditional CD is that it does not allow you to access your money during the account’s term. If you must withdraw your money, you will pay a penalty ranging from three to six months of interest or more, depending on the length of your CD term and the bank’s rules.

While a penalty of a few month's interest may not seem like much, it can quickly add up. For example, if you had $10,000 in a traditional CD earning 5% APY over a twelve-month term, you’d earn around $500 in interest.

But, if you withdraw your $10,000 six months into the term, you’d typically face a penalty of three months of interest, resulting in a loss of $121.98. You would also forfeit any future interest you would earn on the funds you withdraw.

On the other hand, a no-penalty CD does not impose a fine if you withdraw your money early, although each bank has specific rules you must follow. Some no-penalty CDs only allow you to withdraw the entire amount of the CD and do not permit partial withdrawals. Others only allow one withdrawal per quarter or CD term.

Pros and cons of no-penalty CDs

In addition to greater flexibility, no-penalty CDs offer multiple benefits that can help bridge the gap between a savings account and a traditional CD.

Fixed rates: Unlike a savings account, where the interest rate fluctuates based on the economy, the fixed interest rate of a no-penalty CD ensures you’re earning a solid return while still having access to your funds if needed.

Higher APYs: Flexible CDs may offer higher interest rates than some high-yield savings accounts. For example, Marcus by Goldman Sachs provides 4.7% for its no-penalty CD but only 4.4% on its high-yield savings account.

Additional deposits: Some flexible CDs allow you to make further deposits over the CD term, increasing the interest you earn. However, not every no-penalty CD offers this, and the ones that do may limit how much you can add.

Security: Like traditional CDs, no-penalty CDs are protected by the FDIC (Federal Deposit Insurance Corporation) or NCUA (National Credit Union Administration) insurance. The insurance covers up to $250,000 per account holder, per account category, and per institution and helps safeguard consumer money against the unlikely event of a bank failure.

Where to get a no-penalty CD

Not every bank or credit union offers no-penalty CDs, but some banks currently offering liquid CDs are:

Ally Bank: Ally Bank’s no-penalty CD earns 4% APY for an 11-month term, and it is one of the rare banks that does not require a minimum deposit on CDs. Ally allows account holders to withdraw their entire balance at any time after six days of account funding but does not permit partial withdrawals.

Bank of America: Bank of America is a brick-and-mortar bank offering a flexible CD with a 4.25% APY and a 12-month term. You’ll need a minimum deposit of $1,000 to open an account. Bank of America does allow partial withdrawals, but you’ll pay a seven-day interest penalty if you withdraw funds within six days of account funding or six days after a previous withdrawal.

Marcus by Goldman Sachs: Marcus offers a no-penalty CD earning 4.7% for a seven-month term with a $500 minimum deposit. You can withdraw your account balance anytime after the first seven days of account funding.

America First Credit Union: If you prefer working with a credit union, the America First Flexible CD offers a 4.9% APY with a $500 minimum deposit. However, this 12-month term CD has strict withdrawal rules, allowing only one penalty-free withdrawal per quarter. It does allow additional deposits of up to $10,000 per month.

Before you open a no-penalty CD:

• Research multiple banks to find the best APY and term lengths.
• Read the account disclosures to understand the withdrawal rules.
• Ensure you have a healthy emergency fund to help with unexpected expenses so you can let your CD mature for the entire term without making a withdrawal.

How to open your account

Opening a CD account is straightforward and can be done in just a few steps.

1. Research your options: Research the banks and credit unions offering no-penalty CDs. Pay attention to the term length, APY, and the minimum deposit requirements. Be sure to read the withdrawal rules and other account disclosures before proceeding.

2. Fill out an application: Once you’ve selected the best no-penalty CD for you, fill out the bank’s application. The application will ask for personal information to help the bank verify your identity, such as your full name and contact details, mailing address, Social Security number, and birth date.

If you are using a brick-and-mortar bank, you may be able to open an account in person. Otherwise, you can generally open an account online or over the phone.

3. Make the opening deposit: Once your application has been processed, the bank will give you instructions to fund the account. Unless you choose a bank that allows additional deposits on a CD, this is likely the only deposit you’ll make into the account until the CD term ends.

4. Wait for the term to end: If possible, leave your money alone for the entire term. Although you can withdraw funds from a no-penalty CD, it's usually best to complete the term so you can earn the maximum interest. When the term is complete, you can withdraw your funds and earned interest or roll the money into a new CD with a new term and APY.

Alternatives to no-penalty CDs

If a no-penalty CD doesn’t sound like the right way to grow your savings, don’t worry. Other financial products can earn similar APYs and may provide easier access to your funds.

Alternatives to a no-penalty CD include:

A traditional CD: If you’re sure you won't need the funds you’re putting into a CD, using a conventional CD can be an excellent way to grow your savings. For the length of the term, you’ll earn a fixed interest rate. You will face penalties if you withdraw the money early, so be sure you have enough savings to cover emergencies without tapping into your CD.

High-yield savings account (HYSA): A high-yield savings account is one of the best ways to earn as much interest as possible while keeping money available for emergencies. You may find rates lower than no-penalty or traditional CDs, but you can access your funds anytime. Some banks may limit the number of withdrawals you can make before charging a fee. Search for an HYSA that doesn’t require a minimum balance or charge fees.

Money market account: Money market accounts (not to be confused with money market funds, a type of investment product) can generally help you earn a higher interest rate than a traditional checking or savings account. While you can usually access your money anytime, money market accounts may limit the number of monthly transactions you can make.

FAQ

Bottom line

No-penalty CDs can be a great way to boost your savings, but before you open one, ensure you have enough funds in a high-yield savings account to cover any unexpected expenses. Then, thoroughly research your no-penalty CD options and choose the account that offers the best mix of APY, term length, and withdrawal rules to help you grow your money.