If you’re considering opening a certificate of deposit (CD), the possibility of an early-withdrawal penalty might be holding you back from clicking the “Open Account” button. And it’s understandable: No one wants to part with a large sum of money because they need it sooner than expected. But there’s a CD option out there that lets you sleep easy knowing you won’t have to pay early-withdrawal fees, and it’s aptly named: no-penalty CDs.
What is a No Penalty CD?
No-penalty CDs earn interest over a defined period of time, called the term, which can range from a few months to a few years, although some banks and credit unions limit the term of a no-penalty CD to less than a year.
A typical CD has a term that usually ranges from three months to five years, but can be shorter or longer, and if you withdraw your funds before the CD matures during this period, you may incur early withdrawal penalties.
Unlike regular CDs, no-penalty CDs allow for early withdrawals without penalty. Depending on your bank’s withdrawal policy, you may be able to withdraw funds from a no-penalty CD within seven days of the funds being deposited.
Rules regarding withdrawals and fees should be available from your bank or on their website.
No-penalty CDs often earn higher interest rates than savings or money market accounts.
How No-Penalty CDs Can Improve Your Finances
No-penalty CDs can help improve your finances in the following ways:
- Offers higher yields than traditional savings accounts
- By locking in that yield for a set period of time, you can protect yourself from a lower variable rate if interest rates fall.
- Helps you avoid early withdrawal penalties if you need the funds before the end of the term
Pros and Cons of No-Penalty CDs
Like all financial products, no-penalty CDs have pros and cons. Here are some things to consider:
Benefits of No-Penalty CDs
- Easy access: The ability to withdraw money early from a CD without paying a penalty fee is important when you need cash quickly.
- Ability to earn higher returns at your discretion: When interest rates rise, no-penalty CDs have another perk: the opportunity to earn a higher interest rate by withdrawing your money and putting it in another CD with a higher annual percentage yield (APY).
- Guaranteed Rate: CDs offer fixed interest rates that are often higher than money market accounts or high-yield savings accounts, allowing you to grow your savings more quickly.
Disadvantages of No-Penalty CDs
- Withdrawal Limits: You may not be able to make partial withdrawals: If you need to withdraw money early from a penalty-free CD, the bank may require you to withdraw all of your cash and close the account.
- Deposit limits: Like traditional CDs, no-penalty CDs generally don’t allow additional deposits after the account is opened.
- Lowest Rates: Interest rates on no-penalty CDs tend to be lower than traditional CDs of similar terms.
Which banks offer penalty-free CDs?
Although no-penalty CDs have their advantages, they’re not a common product. Few financial institutions offer no-penalty CDs, so it may be difficult to find one that fits your needs.
Here are some banks that offer penalty-free CDs (APYs as of 9/17/2024).
- Ally Bank: Ally Bank requires no minimum deposit at opening and offers an 11-month no-penalty CD with 4 percent annual interest.
- CIT Bank: CIT Bank offers an 11-month, no-penalty CD with an annual interest rate of 3.50 percent and a minimum opening deposit of $1,000.
- Marcus from Goldman Sachs: Marcus offers seven-, 11-, and 13-month penalty-free CDs, all of which require a minimum deposit of $500 and pay 4.50% annual interest.
- Synchrony Bank: Synchrony offers an 11-month no-penalty CD that requires no minimum deposit to open, but Synchrony’s offering comes at a price for the convenience of the “no-penalty” label: Currently, the yield is just 0.25%, far lower than the 4.80% annual interest rate offered on the highest-yielding traditional CDs.
But don’t limit your search to online banks: Some local banks and credit unions also offer penalty-free CDs and other CD alternatives that may offer even more benefits than the better-known national financial institutions.
Before getting a penalty-free CD, compare interest rates and use Bankrate’s CD calculator to calculate how much interest you’ll earn over the term.
Conclusion
If you want to grow your savings without sacrificing liquidity, no-penalty CDs can be a good option.
Another option is a high-yield savings account, which gives you the flexibility to withdraw funds as needed and help grow your savings.
Libby Wells and David McMillin contributed to the latest version of this article.
