What Is a No-Penalty CD?

Quick Answer

A no-penalty certificate of deposit (CD) is a CD that offers a fixed rate on your deposit for a set term, and you can withdraw money before the CD matures without penalty. While no-penalty CDs offer more flexibility, the APY may be lower than standard CDs.

Three colleagues discussing no-penalty 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.

How Does a No-Penalty CD Work?

Like traditional CDs, no-penalty CD accounts earn a fixed interest rate for a fixed term, and when the CD matures, you get your initial deposit back plus any interest earned.

Where no-penalty CDs deviate from the norm is that you can draw from principal and interest earned on the account before the CD matures without paying a penalty fee. However, there may be rules for when you can start taking no-penalty withdrawals.

For example, you may not be able to touch your balance within the first six to seven days of account opening, and if you do, you might forfeit the interest you earned during those days.

Despite being able to withdraw cash early from a no-penalty CD, you shouldn't think of it like a regular savings account. One key difference between a savings account and no-penalty CD is that CDs generally don't allow additional deposits after the initial one. This means if you take money out of a no-penalty CD, you likely won't be able to replenish the account. The less money you have working for you in the CD, the lower your overall interest earnings will be.

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Pros and Cons of a No-Penalty CD

If you're thinking about opening a no-penalty CD, there are some pros and cons to consider.


  • 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.
  • Your money isn't locked away for a full term. If you're hesitant to open a CD account because you're worried about needing to tap into your cash before the CD matures, a no-penalty CD makes it possible to take advantage of higher interest rates while giving you the flexibility to draw money if you need it.


  • Only select financial institutions have no-penalty CDs. Not all banks or credit unions offer no-penalty CDs, so you may have to shop around to find one.
  • Annual percentage yields (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.
  • 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, and interest returns will be lower the less money you keep in your account.

How to Open a No-Penalty CD

If you decide a no-penalty CD is right for you, these are the steps for opening an account:

  1. Compare CDs. Review APYs, terms and withdrawal conditions for no-penalty CDs to find options with competitive rates and withdrawal rules that fit your needs.
  2. Check initial deposit requirements. Some no-penalty CD accounts don't set a minimum requirement for the initial deposit, while others may require that you deposit $500 to $1,000 to start. Look for a no-penalty CD with a minimum deposit that fits your budget.
  3. Apply for the account. You can apply for many no-penalty CDs online. During the application process, the bank or credit union may ask for information like your name, address and Social Security or tax identification number to set up your account.
  4. Deposit funds. The last step is depositing money into your CD. From there, you can watch interest accrue on your CD and make withdrawals per the terms of your account.

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 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.