Are No-Penalty CDs Worth It?

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Certificates of deposit (CDs) have become an attractive place to store money for the short term in recent years, thanks to interest rate hikes.

But traditional CDs require you to lock up your money for a certain term length — typically three months to five years. Pulling your money out early results in penalties, which can eat away at your earnings.

Enter no-penalty CDs. This type of account allows you to access your money anytime without fees, even if it is before the end of your term. With rate decreases predicted for late 2024, now could be the right time to consider a no-penalty CD.

What Is a No-Penalty CD?

A certificate of deposit (CD) is a type of savings account that pays interest for a specific term. The interest rates are typically higher than those that come with a traditional savings account, so your money can earn more.

However, while traditional CDs charge a penalty for withdrawing funds early, there are no fees with a no-penalty CD. No-penalty CDs are sometimes called liquid or breakable CDs, since you can access your funds before the maturity date without penalty.

In addition to making your funds more accessible, no-penalty CDs also give you the option to change CDs if rates increase (with a traditional CD, you’re stuck with that lower rate for the term length).

No-penalty CDs generally have a shorter term of up to 13 months, while traditional CDs can have term lengths of as long as five years. The lack of withdrawal penalties come at a cost: No-penalty CDs tend to offer lower rates than traditional CDs.

What Are the Pros and Cons of a No-Penalty CD?

There are benefits and drawbacks to a no-penalty CD. While they provide added flexibility, there are sometimes restrictions regarding how you access your funds.

Pros	Cons
Access to funds anytime penalty-free Fixed APY Federally insured	Deposit restrictions No partial withdrawals with some banks Lower interest rate than traditional CDs

Pros of a No-Penalty CD

A no-penalty CD frees you of penalties by allowing you to access your funds at any time without paying a fee. Some accounts may have an initial period where your funds are frozen, but this is only temporary and usually when you first open your account. Ally Bank is one such example, mandating a six-day initial holding period of funds.

No-penalty CDs, like traditional CDs, pay you interest for a set amount of time. These accounts often earn a competitive fixed APY, unlike a traditional savings account that earns very little interest in comparison. That can give you added peace of mind because the rate is locked in for the entirety of your term; your APY won’t decrease even if interest rates go down.

Your money is protected, too. Like a traditional checking and savings accounts, no-penalty CDs are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) for up to $250,000 per depositor per account.

Cons of a CD

No-penalty CDs also come with some drawbacks. You typically cannot make deposits after you initially add your funds, so it is not ideal if you are looking to grow your savings. Marcus by Goldman Sachs is one such example; accountholders cannot make deposits that extend the balance beyond $500. In this case, a high-yield savings account may be a better choice.

There also may be no partial withdrawals. Some banks like Ally and Marcus by Goldman Sachs require you to withdraw all of your funds instead of a portion. That means you will need a whole new account if you need to make a withdrawal — even if you don’t need your full funds.

Alternatives to a No-Penalty CD

A no-penalty CD is not your only option if you want to stash your cash in an account with interest.

Traditional CDs: Traditional CDs come with penalties for early withdrawals, but they also tend to offer higher interest rates than no-penalty CDs. One strategy is to ladder your CDs, which is when you open several CDs and stagger the terms so they have different maturity dates. This gives you continued access to funds with the ability to reinvest in a new CD when rates are high.
High-yield savings account: A high-yield savings account offers a higher annual percentage yield (APY) than a traditional savings account, but there is a variable rate instead of a fixed one. While this allows you to take advantage of increases in interest rates, your money is also susceptible if they fall.
Money market account: This hybrid account combines the best of both checking and savings accounts by offering debit and check-writing services with interest rates that exceed traditional savings accounts.

Is a No-Penalty CD Worth It?

There are many benefits to using a no-penalty CD, but it’s not for everyone.

A no-penalty CD may be a good choice if you think you might need your funds in the short term, but it is not an ideal solution for long-term savings, which are usually better off invested.

It is possible to find interest rates of 5% and more based on the current federal funds rate, making it an attractive time to consider a no-penalty CD. If a no-penalty CD is right for you, some of the best banks for no-penalty CDs include Ally Bank, Synchrony Bank, and Marcus by Goldman Sachs.

Before you make a deposit, be sure to compare rates and carefully review terms to find the best no-penalty CD for your money.

Sources

Federal Deposit Insurance Corporation. (2024, April 23). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html.

Federal Deposit Insurance Corporation. (2024, April 22). Deposit Insurance FAQs. Retrieved from https://www.fdic.gov/resources/deposit-insurance/faq/index.html.