No-Penalty CD vs. Savings Account: Which Is Best for Your Money?

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Earning extra interest on your cash can help you hit your goals quicker — but where’s the best place to park your money?

Savings accounts and no-penalty CDs both offer high interest rates and flexibility for your spare cash with the ability to access your funds at any time. And both are protected with FDIC insurance to keep your funds safe.

But no-penalty CDs and savings accounts both operate differently and choosing the right one can help you hit your savings goals faster.

Introduction: Understanding Your Options

CDs and savings accounts both let you earn interest on your extra cash. However, they have different approaches.

• CDs lock you into a rate until the maturity date, just like a bond.
• Savings accounts have variable APYs that can change at any time.
• Both of these options can help risk-averse investors accumulate risk-free money.

What Is a No-Penalty CD?

A no-penalty CD is a certificate of deposit account that pays a high interest rate but also does not penalize you for withdrawing your funds early. While no-penalty CDs do have a set term length, you can access your funds at any time.

Traditional CDs penalize you for withdrawing funds before the end of the term. Most will penalize you with a fee equivalent to a few months of the interest you earned. Some may even charge a flat fee and cause you to lose money.

But no-penalty CDs remove that fee and give you more flexibility in how you access your funds. This flexibility does come with a cost, though, as most no-penalty CDs have a lower interest rate than traditional CDs.

Here are some other key points to know:

• No-penalty CDs can have terms ranging from a few months to multiple years.
• Most financial institutions offer fewer no-penalty CDs compared to traditional CDs.
• No-penalty CDs are insured by the Federal Deposit Insurance Corporation, just like a savings account.
• Most institutions insure up to $250,000 in deposits, per person, protecting your funds in case of bank failure.
• No-penalty CDs typically have a minimum deposit requirement you need to meet in order to open the account.
• In most cases, if you do happen to withdraw funds early, you’ll have to withdraw the full amount.

What Is a Savings Account?

A savings account is an interest-bearing deposit account that lets you earn interest on your deposited cash. Savings accounts are available at most banks and credit unions. They may be linked to a checking account when you first open an account with the financial institution.

Keep these key takeaways in mind:

• The interest rates for most savings accounts are variable — meaning the rates can change at any time.
• Savings accounts are FDIC-insured and typically come with very few fees.
• They also don’t usually have any restrictions on accessing your cash.
• Many even come with an ATM card so you can withdraw funds from anywhere.
• There are two main types of savings accounts — traditional and high-yield savings accounts.
• High-yield accounts offer better interest rates than a traditional savings account but may have account restrictions, such as monthly transaction limits.

Interest Rates: No-Penalty CD vs. Savings Accounts

Both no-penalty CDs and savings accounts offer similar interest rates. Current rates as of February 2025 range from 4.00% to 5.00% APY on both no-penalty CDs and high-yield accounts.

With no-penalty CDs, your rate is fixed. This means it won’t change for the duration of your term. But the rate will vary, depending on the term length chosen.

Savings account interest rates are almost always variable — meaning the rate can change at any time. Rates typically move up or down with the federal funds rate set by the Federal Reserve.

No-penalty CDs and savings accounts have comparable APYs and vary for each financial institution. However, a no-penalty CD may be advantageous if you believe the Federal Reserve will cut rates. Similarly, high-yield savings accounts may be better if you think the Fed will raise rates.

Liquidity: Accessing Your Funds

No-penalty CDs do have a term length and minimum deposit but they don’t lock your money behind a withdrawal penalty like regular CDs. You can withdraw your funds at any time with no extra fees. But you might need to withdraw your entire deposit to access your funds.

Your funds are more accessible in a savings account. Account holders can set up automatic transfers from their savings accounts to other accounts.

It’s also possible to withdraw funds from a savings account using an ATM, while CDs don’t offer this option. You can make partial withdrawals at any time, but most accounts limit you to six withdrawals per month before additional fees apply.

Risk and Safety: Which Is Safer for Your Money?

Both accounts are insured by the FDIC, so you won’t have to worry. The FDIC insures up to $250,000 for CDs and savings accounts.

You won’t lose money with these investments, but it is possible that you lose purchasing power. Not every savings account or CD keeps up with inflation, and you also have to consider taxes. A 4.00% APY will have a lower real return since interest is treated as ordinary income.

The other risk is opportunity cost. Other investments like stocks have the potential to outperform CDs and savings accounts by wide margins. These financial products are more suitable for retirees or people who need to access their cash within the next 6 – 12 months.

CDs and savings accounts are also great for emergency funds. You might as well earn extra interest on the money you plan to store anyway.

Short-Term vs. Long-Term Goals

Savings accounts are optimal for short-term goals since the cash is readily accessible. However, CDs are more suitable for medium-term goals. A 3-year CD lets you lock in a good rate instead of worrying if Fed rate cuts will affect the APY on your high-yield savings accounts.

Investors with long-term goals may want to consider equities since that asset class can produce higher returns.

Pros and Cons To Know

When comparing a no-penalty CD vs. savings account, weighing the pros and cons can help you decide which is the best fit for your needs.

Benefits of No-Penalty CDs

• Accessibility. No-penalty CDs are great for investors who want to earn interest on their cash but still have access to it without any fees. These CDs let you deposit funds and access them anytime without paying a penalty to the bank like a traditional CD.
• Fixed rates. No-penalty CDs also offer fixed interest rates so your rate won’t change for the duration of the term. This lets you earn the same rate until the CD term ends.
• FDIC-insured. No-penalty CDs are FDIC-insured and your money is protected up to $250,000 in most cases.

Benefits of Savings Accounts

• No minimums or fees. Savings accounts are simple to open, don’t require a minimum deposit, and let you earn interest on your uninvested cash. Savings accounts usually don’t come with any pesky monthly fees — and the interest you earn can compound daily.
• Accessible. Savings accounts are also highly liquid so you can access your cash at any time with no limitations. Some even come with an ATM card for withdrawing cash on the go. There may be some high-yield accounts that impose withdrawal limits, but those are few and far between.
• Automated. Savings accounts also make it easy to set up automatic deposits so you can save money in the background.

Drawbacks of No-Penalty CDs

• Lower rates. Most no-penalty CDs offer lower rates for more access to your cash. This means the best rates are usually reserved for CDs that have penalties for withdrawing early.
• One withdrawal allowed. In most cases, withdrawing from your no-penalty CD requires removing all funds and ending the term.
• Limited availability. No-penalty CDs may not be offered in your bank, as they are specialty CDs.

Drawbacks of Savings Accounts

• May have low rates. While high-yield savings accounts pay great rates, most regular savings accounts don’t. Choosing a traditional savings account may lose you money in the long term.
• Variable rate. Most savings accounts come with a variable interest rate that can change at any time.
• Withdrawal limits. Some savings accounts impose withdrawal limits. This means you might pay fees for too many withdrawals in a single month.

How To Choose Between a No-Penalty CD vs. Savings Account

Choosing between a no-penalty CD and a savings account depends on your investing goals and access requirements. Consider these points when deciding:

• No-penalty CDs are great for those looking for a fixed interest rate account with no penalties for accessing funds early.
• No-penalty CDs may have better interest rates than some savings accounts. Locked rates make them better for medium-term goals.
• Savings accounts are better for those who want immediate access to their cash in any amount and still want to earn interest.
• Savings accounts may come with ATM access. As such, they would be a better fit for those who want to be able to withdraw cash directly from their account.
• Savings accounts are more beneficial for people who have short-term financial goals, such as saving money for the next tax season.

Ultimately, the choice comes down to flexibility and preferences — as well and overall financial goals.

Conclusion: Making the Right Decision for Your Savings

If you’re choosing between and no-penalty CD or a savings account, it’s important to ask yourself a few questions:

• What am I saving for?
• Do I need to access all or part of these funds?
• How long do I plan on keeping the money invested?
• Do I need ATM access?

If you prefer to avoid touching the funds and want a fixed interest rate, a no-penalty CD may be a better choice.

But if you need more regular access to your funds and want to be able to withdraw cash at any time, a savings account would be a better fit.

Both accounts can help you earn more interest and encourage you to save. It comes down to your personal situation and financial goals to pick one over the other.

Marc Guberti contributed to the reporting for this article.

Information is accurate as of Feb. 25, 2025.

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