No-penalty CDs: Guaranteed interest with more-flexible withdrawals

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In a Nutshell

No-penalty CDs can give you a guaranteed interest rate on your savings while still letting you access your money if you really need it. But no-penalty CDs may have lower interest rates than traditional CDs.
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Disappointed with the low interest rate on your savings account but like its flexibility? You might want to look into a no-penalty CD.

No-penalty CDs are a special kind of certificate of deposit that provides the same guarantee of returns as you see with traditional CDs — but they don’t have the fees you normally face when withdrawing money from a CD before the end of its term.

Learn more about no-penalty CDs.



What is a no-penalty CD?

With a typical savings account, you can deposit and withdraw money whenever you like. But traditional savings accounts generally pay low interest, and the rates can change at any time.

A CD is different. You agree to deposit money for a fixed period of time — usually something like six months, a year or five years — at a fixed interest rate. When you redeem or cash out your CD at the end of the term, you get back your initial deposit plus the interest. But if you withdraw money before the term ends, you’ll typically have to pay a penalty (usually a number of days’ worth of interest).

No-penalty CDs still offer a guaranteed interest rate, but they don’t charge penalties for early withdrawal — with one exception. You may still face a penalty if you withdraw your money within six or seven days of opening the CD.

How do no-penalty CDs work?

Essentially, no-penalty CDs work the same way as traditional CDs. You choose a CD, make your deposit, wait for a period of time and earn your interest.

But banks and credit unions may offer different interest-earning rates, minimum deposits or time periods for their no-penalty options. No-penalty CDs can have irregular or short terms (say, seven months or 11 months), a larger minimum deposit or a slightly lower annual percentage yield.

Because no-penalty CD rates are guaranteed, you’ll know what you’re going to earn. For example, with a seven-month CD at 0.45% interest, you’ll earn $2.64 on a $1,000 deposit by the end of the CD term. On an 11-month CD at 0.5% interest, you’ll earn $45.82 on a $10,000 deposit.

Some no-penalty CDs may have a maximum of one penalty-free withdrawal per quarter or per year before the maturity date. They may also require you to withdraw the entire balance, not allowing partial withdrawals. Be sure to read the fine print carefully and consider your financial situation before committing.

What are some pros and cons of no-penalty CDs?

Pros

  • Greater flexibility — Traditional CD aren’t liquid — you can’t get to your money if you need it without paying the price. A no-penalty CD reduces that risk. If you need your money, you can access it without paying a penalty, according to the terms of your CD.
  • Higher interest rate than other options — Even penalty-free CDs typically offer higher rates of return than savings accounts.
  • Guaranteed rate of return — Just like with other CDs, you’ll know the interest rate you’re going to earn when you open a no-penalty CD account. Many banks offer a CD calculator so you can figure out exactly how much you’ll earn in interest ahead of time.
  • FDIC insured Most CDs are guaranteed by the federal government, just like savings accounts. This makes them safer than an investment like stocks or mutual funds.
  • Potential reward for renewing your CD — Many banks allow you to renew your CD when your term is nearing its end. Some even reward you for doing so — offering a slight bump up in your interest rate.

Cons

  • Interest rates can be lower than traditional CDs — You may need to compromise on interest in exchange for the flexibility a no-penalty CD offers. Interest rates can be lower than other CD options.
  • Number of penalty-free withdrawals may be limited — Just because it’s a penalty-free CD doesn’t mean you can take your money out whenever you want with no consequences. Many of these CDs limit you to one penalty-free withdrawal per quarter, year or term. And remember that you typically can’t take your money out for at least six days after opening your no-penalty CD.
  • May have a minimum deposit requirement — Many banks require you to deposit a certain amount to open a CD. Minimum deposits can range anywhere from $250 to $10,000, though you may be able to open a CD without a deposit.

What do no-penalty CDs cost?

There is generally no cost to open or maintain a no-penalty CD, though you’ll need to make an initial deposit to open one. You’ll also be able to make a withdrawal for free with a no-penalty CD — that’s the selling point.

But note whether your no-penalty CD offers a lower interest rate than other options. You’re potentially leaving money on the table — which you could be earning if you’d chosen a savings product with a higher interest rate.

How do I open a no-penalty CD?

Many banks let you open a no-penalty CD online, though others may require you to call in, email or visit a branch.

Typically, you’ll need the following information handy:

  • Your Social Security number
  • Photo ID
  • A way to fund the CD, like a credit card or checking account
  • An email address

Because every no-penalty CD is different, you’ll want to read all the disclosures carefully. They’ll help you fully understand how your CD works and how you can avoid fees.

What are some no-penalty CDs to consider?

Terms and interest rates available on no-penalty CDs can vary widely. Here are a few you might take a look at. Rates and terms detailed below are accurate as of March 2021. Keep in mind that financial institutions can change their CD offerings, including rates and terms, so be sure to check current information before depositing your money.

Name Term APY Minimum deposit Withdrawal period
Ally Bank No-Penalty CD 11 months 0.50% None Any time after first 6 days. No partial withdrawals.
CFG Bank CD 13 months 0.62% $500 1 withdrawal per term, 6 days or more after account opening.
CIT Bank No-Penalty CD 7 months 0.45% $500 Any time after first 7 days. No partial withdrawals.
Marcus by Goldman Sachs No-Penalty CD 7 months 0.45% $500 Any time after first 7 days. No partial withdrawals.
My eBanc Flex Time Deposit 11 months 0.35% (balances less than $100,000)

0.40% (balances $100,000 and more)
$10,000 7-day notice required for withdrawals. 2 partial withdrawals permitted per term.

Alternatives to no-penalty CDs

When you’re searching for a greater yield — better earnings — on your savings, a no-penalty CD isn’t your only option. Here are a few alternatives to explore.

  • Regular CDs — These products may offer lower minimum deposits and higher yields. You’ll just need to pay a penalty if you take your money out early.
  • Jumbo CDs — If you have a lot of money saved, a jumbo CD can be a good option. This refers to CDs of more than $100,000. They tend to have higher APYs, but they can also have longer terms and significant early-withdrawal penalties.
  • High-yield savings accounts These accounts are especially common at online banks and offer higher interest rates than regular savings accounts. With savings accounts, you may have more access to your money. But these accounts may have steeper minimum balances to open and be less convenient than a traditional bank on the corner.
  • Money market accounts These are special types of savings accounts that tend to have higher interest rates while still being insured by the FDIC. But they sometimes require a higher minimum balance and may be limited to a set number of transactions per month.

About the author: Andrew Dunn is a veteran journalist with more than a decade of experience as a reporter and editor at North Carolina news organizations, including the Charlotte Observer and the StarNews… Read more.