By Kim PorterWhat Is a No-Penalty CD?
Quick Answer
A no-penalty certificate of deposit is a CD that allows you to withdraw money before the CD matures without penalty. While no-penalty CDs offer more flexibility, the APY may be lower than with standard CDs.
Taking money out of a certificate of deposit (CD) before it matures usually means you have to pay an early withdrawal penalty—unless you have a no-penalty CD. A no-penalty CD is a special type of CD that lets you withdraw money before the end of the term without a fee. Read on to learn how no-penalty CDs work, the pros and cons of using them and how to open one.
What Is a No-Penalty CD?
A no-penalty CD is a type of account that doesn't charge a fee if you decide to withdraw funds before the CD reaches maturity if you follow its requirements. This feature differentiates no-penalty CDs from traditional CDs, which charge an early withdrawal penalty if you take money out of the account before the term ends.
No-penalty CDs are more rare than their traditional counterparts. If a financial institution offers no-penalty CDs, it usually offers just one or two term options rather than having several to choose from. Many institutions set terms under one year.
How Does a No-Penalty CD Work?
A no-penalty CD works much like a standard CD: Both are time deposit accounts that pay an annual percentage yield (APY) when you hold your funds for a certain set period. You can choose a term based on the institution's offerings and decide how much to deposit, as long as it meets the bank or credit union's minimum requirement. Most CDs won't allow you to add money after that initial deposit.
Federal law stipulates minimum penalties for early withdrawals on all CD accounts, including no-penalty CDs. Tapping your CD within the first six days of account opening results in an early withdrawal penalty worth at least seven days' interest.
Beyond that time frame, you can draw funds from a no-penalty CD without paying a fee.
Your APY is typically fixed and guaranteed for the length of the CD term. When you close the account, you get your initial deposit back plus any interest earned.
Tip: If you keep your no-penalty CD at a federally insured bank or credit union, you'll get up to $250,000 in deposit insurance per depositor, institution and ownership category. This type of insurance reimburses you if your bank or credit union fails.
Learn more: How to Invest in CDs
Pros and Cons of No-Penalty CDs
No-penalty CDs are a good option if you want the flexibility to withdraw money without an early withdrawal penalty; however, they aren't as common and may offer lower interest rates than traditional CDs.
Pros
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No-penalty CDs offer a fixed rate. Interest rates are locked in, so you'll earn a guaranteed return on the money you keep in the account. In comparison, savings accounts tend to have variable interest rates that can change, so returns aren't guaranteed.
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Your funds are more liquid. A no-penalty CD makes it possible to take advantage of higher interest rates while giving you the flexibility to withdraw your money if you need it without paying a penalty.
Cons
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Only select financial institutions offer no-penalty CDs. Not all banks or credit unions offer no-penalty CDs, so you may have to shop around to find one.
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APYs may be lower than on standard CDs. Since you're not guaranteeing you'll hold money in a CD for a fixed period, financial institutions may offer lower APYs on no-penalty CDs compared to traditional CDs.
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Withdrawing from a CD can diminish interest earnings. When there isn't a penalty for taking money out of a CD, you might be more inclined to dip into your savings—but interest returns will be lower the less money you keep in your account.
Where to Get a No-Penalty CD
No-penalty CDs are less common than standard accounts, so you may need to shop around to find one. Here are some examples of banks and credit unions that offer no-penalty CDs:
- Ally Bank
- CIT Bank
- Marcus by Goldman Sachs
- BCU
Alternatives to No-Penalty CDs
If you can't find a no-penalty CD that meets your needs, you can consider these savings alternatives:
- Traditional CD: A traditional CD comes with a fixed interest rate and term that typically ranges from three months to five years. These standard accounts often come with higher APYs than no-penalty CDs.
- Brokered CD: A brokered CD is a type of CD you open at a brokerage or investment firm. They often come with higher APYs than standard CDs, and if you want to close the account before it matures, you can avoid the early withdrawal penalty by selling the CD on the secondary market.
- High-yield savings account: High-yield savings accounts offer higher APYs than standard savings accounts, and they usually allow you to make a limited number of withdrawals each month with no fee.
- Money market account: A money market account may pay better APYs on higher account balances, and you can typically make a limited number of convenience transactions directly from your account each month (with no penalty).
Learn more: Are CDs Worth It?
The Bottom Line
Choosing a no-penalty CD can minimize your risk of early withdrawal penalties if there's a chance you might need to access your savings before a CD matures. However, CDs aren't your only option for saving. In some cases, high-yield savings accounts could offer rates that are comparable to no-penalty CD rates. And going with a high-yield savings account instead of a no-penalty CD could make more sense if you want to grow your balance with regular deposits. Exploring all account options can help you find the best place to park your savings.
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About the author
Kim Porter
Kim Porter began her career as a writer and an editor focusing on personal finance in 2010 and has since been published everywhere from Yahoo! Finance to U.S. News & World Report, Credit Karma, USA Today, Fortune and more.
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