Who doesn’t want the best of both worlds when it comes to investing? A no-penalty certificate of deposit might be just the savings product for you if you want the financial security and high return of a certificate of deposit plus the flexibility of accessing your money without paying withdrawal penalties.
A no-penalty CD, also referred to as a liquid CD, is a type of certificate of deposit that earns interest and allows you to withdraw your money early without paying a fee. Before getting into the details, you’ll need to be fully informed as to what a CD actually is.
- How Does a No-Penalty CD Work?
- Is a No-Penalty CD Right for You?
- Which Banks Offer No-Penalty CDs?
- No-Penalty CD Alternatives
A certificate of deposit is often considered a low-risk investment opportunity, as your principal is typically safe because it’s insured up to $250,000 by the Federal Deposit Insurance Corp. or National Credit Union Administration. But a certificate of deposit requires time and a funding commitment. To maximize the amount of money you can earn in interest, you’ll need to park your funds in an account and not withdraw them. A typical traditional CD term lasts anywhere from three months to five years.
The longer the CD term, the higher the interest rate you can garner. But touch the money prior to its maturity, and federal law mandates forfeiture of a minimum of seven days of interest. Because there are no rules regarding capping the maximum early withdrawal penalty, banks and credit unions often impose higher penalties for early withdrawal. Many do so by charging a percentage of the amount withdrawn, which could far exceed the seven-day interest minimum.
It’s for this reason that rare, no-penalty CD accounts are so enticing to depositors. But there are some disadvantages to a liquid CD. Although no-penalty CDs sound like they provide depositors with the best of both worlds, the trade-off is a reduced interest rate.
For the luxury of not having to commit to the long term of a traditional CD, the account will likely come with a below-average CD rate, thus reducing the earning potential of the investment. But the lower interest rate might be a fair exchange for no penalties if you think you might need to access the money in your CD before the account matures — either to finance an unanticipated purchase or to pay bills if you’re strapped for cash unexpectedly.
It is important to thoroughly investigate the terms of a no-penalty CD so you’re not caught off guard with lost earnings. In conjunction with federal laws, many financial institutions allow withdrawals within seven days of opening the account, with any accrued interest forfeited.
Before locking your funds away in a traditional or no-penalty CD, make certain to read all the details of the account contract to ensure that the investment realistically fits your needs. Check the fine print to know whether you’re allowed to withdraw a partial amount — and how many partial withdrawals you’re allowed to make.
Imagine you sign up for a no-penalty CD that allows three partial withdrawals. You make those three withdrawals. When you go to close the account, you’re charged a penalty for the final withdrawal because it was considered a fourth one. Knowing the rules ahead of time could save you money.
Below is a list of financial institutions that still offer no-penalty CDs despite a sharp decrease in their prevalence.
|Best No-Penalty CDs|
|Bank||Interest Rate (APY)||Term||Minimum Amount||Withdrawals Allowed|
|Ally Bank||0.60%||11 months||Under $5,000, Under $25,000 or $25,000 and up||One full balance withdrawal|
|CIT Bank||0.30%||11 months||$1,000||One full balance withdrawal|
|Citizens Access||0.15%||11 months||$5,000||One full balance withdrawal|
|Colorado Federal Savings Bank||1.73%||11 months||$5,000||One full balance withdrawal|
|Investors eAccess||1.80%||6 months||$500||One full balance withdrawal|
|Marcus by Goldman Sachs||1.90%, 2.00% or 1.65% based on term||7, 11 or 13 months||$500||One full balance withdrawal|
|My eBanc||1.90% or 2.00% depending on account minimum||11 months||$10,000 or $100,000||Two partial withdrawals|
|PurePoint Financial (Union Bank)||1.80%, 1.55% or 1.65% depending on term||11, 13 or 14 months||$10,000||One full balance withdrawal|
No-penalty CDs are a good savings option if you’d like to earn a higher interest rate without locking your funds in for a long time. As long as you don’t foresee needing the funds before the term ends, this option might work for you. But remember that many no-penalty CDs only allow you to make a single full withdrawal of the funds without a penalty. This means you’ll be withdrawing your funds only once during the term of the CD — and it’s probably at closing time.
A high-yield savings account might be a better alternative if you’d like to occasionally tap into your savings or even grow the amount by depositing more funds. Many high-yield accounts offer similar interest rates to the best no-penalty CDs and allow you to make up to six free withdrawals per month. Here are some rates, current as of Feb. 13, 2020, to give you an idea. You might notice that some of the accounts are provided by the same banks offering no-penalty CDs, but the high-yield accounts pay a similar — or better — interest rate and offer more flexibility with withdrawals.
- Brio Direct: 1.10% APY
- CIT Bank: 1.75% APY
- Citizens Access: 1.85% APY
- Marcus by Goldman Sachs: 1.70% APY
- PurePoint Financial: 1.90% APY
- Synchrony Bank: 1.70% APY
For a more detailed comparison, check out the Best Online Savings Accounts for Earning High-Yield Profits. You might decide that a high-yield or online savings account serves your short-term needs better than a no-penalty CD.
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Rates for Ally Bank, CIT Bank and Citizens Access are subject to change; unless otherwise noted, rates are updated periodically. Brio Direct rate is accurate as of June 12, 2020. All other information on accounts is accurate as of Feb. 13, 2020.
Rates for all other financial institutions mentioned are subject to change. Information on accounts is accurate as of Feb. 13, 2020.