Who doesn’t want the best of both worlds when it comes to investing? If you want the financial security and high return of a certificate of deposit, but the flexibility of accessing your money without paying withdrawal penalties, a no-penalty CD might by just the savings product for you.
Before getting into the details of a no-penalty CD, you’ll need to be fully informed as to what a CD actually is.
The Catch with a No-Penalty CD
A certificate of deposit is often considered a low-risk investment opportunity, as your principal is typically safe because of FDIC or NCUA-insurance protection up to $250,000.
The longer the CD term, the higher interest rate you can garner. But if you touch the money prior to its maturity, federal law mandates a forfeiture of a minimum of seven days of interest. Since there are no rules capping the maximum early withdrawal penalty, many banks and credit unions impose higher penalties for early withdrawal, at times as high as 90 days’ worth of earnings.
It’s for this reason that rare, no-penalty CD accounts are so enticing to depositors. However, there are some disadvantages to this type of CD, as well.
No-penalty CDs sound like they provide depositors with the best of both worlds, but there is always a sacrifice to be made when opting for this certificate of deposit alternative. The option to have no penalties for early withdrawal is going to cost you in the guise of 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. 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 in the event that you’re strapped for cash unexpectedly — the lower interest rate might be a fair exchange for no penalties.
Is a No-Penalty CD Right for You?
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.
Some institutions might not charge more than the federally-mandated penalty for pulling funds once the account is active, while others might require that you wait 90-day period before accessing your money.
It’s worth noting, however, that many traditional CDs allow depositors to withdraw a certain portion of their deposits once within a specified amount of time, usually once per year or six months. Additionally, most no-penalty CDs allow depositors to withdraw at no cost once funds have been deposited for seven days.
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.
A List of Available No-Penalty CDs
Below is a list of financial institutions that still offer no-penalty CDs, despite a sharp decrease in their prevalence. It’s important to note that a few of these institutions, particularly online banks like Ally Bank, still offer impressively high yields on their no-penalty CDs despite the caveat mentioned above.
- Ally Bank‘s 11-month No-Penalty CD: 2.20% APY
- Artisans’ Bank‘s 7-month No-Penalty Certificate of Deposit: 0.05% APY
- Dollar Bank‘s Three Month No-Penalty Certificate: 0.03% APY
- Eagle Bank‘s 18/12-month No-Penalty CD: 0.30% APY
- Susquehanna Bank‘s 12-month Liquid CD: 0.20% APY
- Swineford National Bank‘s 9-month No-Penalty CD: 0.15% APY
- The Columbia Bank‘s 12-month No-Penalty CD: 0.05% APY
- Two River Community Bank‘s 12-month Penalty-Free CD: 0.35% APY