What Is A No-Penalty CD?

Laveta Brigham

If you prefer to invest in certificates of deposit, you probably know that you would have to pay a penalty for withdrawing your cash early for many of them. The cost of breaking your CD before its maturity date can be extremely expensive in some cases. However, there is another […]

If you prefer to invest in certificates of deposit, you probably know that you would have to pay a penalty for withdrawing your cash early for many of them. The cost of breaking your CD before its maturity date can be extremely expensive in some cases. However, there is another option some financial institutions offer: no-penalty CDs.

Here is everything you need to know about no-penalty CDs.  

What is a no-penalty CD?

A no-penalty CD is a type of certificate of deposit that earns interest over a set period of time. The major difference from a traditional CD is that you can make a withdrawal early without paying a penalty fee.

You may be able to withdraw your investment without paying a penalty in as little as seven days after you’ve funded the CD. However, each financial institution sets its own rules, so you may need to wait several months to withdraw the money. Read the fine print before buying the product.

In buying a no-penalty CD, you can potentially earn a higher interest rate than you would through your savings account or through your money market account. 

No-penalty CDs are also known as breakable or liquid CDs. 

Pros and cons of no-penalty CDs

As with all financial products, no-penalty CDs have their pros and cons. Here are some things you should take into account:

Pros of a no-penalty CD 

  • Added flexibility: The ability to take out money from your CD early without paying a penalty fee is beneficial for times when you quickly need cash. When interest rates rise again, this product could offer another perk: You could take out your money early to put it into another CD that offers a higher rate.
  • Guaranteed rate: You will get a fixed interest rate to build your savings. The rate can be higher for no-penalty CDs than if you put your savings in a money market account or a high-yield savings account.

Cons of a no-penalty CD

  • All or nothing: You may not be able to make partial withdrawals. If you need to take out money early from a CD, the bank may make you withdraw all of your cash and close the account.
  • Multiple deposits not permitted: Just like with a traditional CD, you usually aren’t allowed to make multiple deposits into no-penalty CDs. 

Penalties for early CD exits can sting

If you have used CDs as a part of your savings strategy, you probably realize that withdrawing money from a traditional CD early can result in steep penalty fees.  

In fact, it can be one of the biggest deterrents for buying a CD. Life happens and you may require fast funds to solve a dilemma, such as a car repair or medical expense. If you don’t have an emergency fund, then you might need to pull funds out of the CD early. In doing so, you would pay a penalty fee for the sake of having the cash to cover your unexpected expenses. 

The penalties for cashing out your CD before it matures can be steep. For long-term CDs, savers could lose around 180 days worth of interest. But even for a short-term CD, savers may stand to lose 90 days worth of interest for cashing out their CD early. 

It’s here where a no-penalty CD shines. With the help of a no-penalty CD, you’ll have the ability to withdraw your funds in the event of an emergency without sacrificing any interest earned. 

Are CD rates locked in?

Like traditional CDs, no-penalty CDs are fixed-rate accounts where the rate is normally locked in for a set period of time and savers can expect to earn a set amount of interest. 

Although the interest rates are locked in with a no-penalty CD, expect to earn less interest on your no-penalty CD if you withdraw your money early than if you left your deposit parked there until it matured. 

How to choose a no-penalty CD

A no-penalty CD is not ideal for everyone. Before you decide to move forward with a no-penalty CD, consider the trade-offs involved.

“The biggest drawback of owning a penalty-free CD is that the interest rate you earn on your investment will be lower than a ‘regular’ CD,” says Doug R Jackson, a private wealth manager at Boulevard Wealth Partners.  

However, the ability to withdraw your funds at any time could benefit you. If you run into an emergency, you can access your funds without paying the cost of a penalty. 

You may get a higher rate with a traditional CD than with a no-penalty CD. So, a decision to use a no-penalty CD could cost you some growth potential in your savings. But you will have the peace of mind that you can use the funds at any time. 

Make sure that you understand when you are eligible to withdraw money and how many withdrawals you are able to make. Often, you will be required to withdraw the entire amount but only after a certain amount of time has passed since opening the account. 

Before you pull the trigger on buying a no-penalty CD, it’s important to compare CD rates from multiple banks. Consider using Bankrate’s CD calculator to find out more about what you stand to gain by putting your money in a CD. 

Which banks offer no-penalty CDs?

Although a no-penalty CD may sound like an ideal financial product, not many financial institutions offer them. With a limited number on the market, you might  find it challenging to find a no-penalty CD that suits your needs. 

Here are a few banks that offer no-penalty CDs: 

  • Ally Bank: Ally Bank offers no-penalty CDs. Depending on your initial deposit, an 11-month term pays up to 1.90 percent APR. 
  • CIT Bank: CIT Bank offers 1.8 percent APR on an 11-month CD. You will need to deposit at least $1,000 to open this account. 
  • Marcus by Goldman Sachs: Marcus by Goldman Sachs offers no-penalty CDs. You can open a 7-month CD with a minimum deposit of $500 to earn 1.90 percent APY. It also offers 11-month and 13-month no-penalty CDs that earn a lower rate.

Bottom line

Take a closer look at your finances before choosing a no-penalty CD. If you are looking to grow your savings without sacrificing liquidity, then seek out a no-penalty CD that works for your timeline. Or consider opening a high-yield savings account to grow your savings while also having added flexibility to withdraw funds when you wish.  

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