What Is a No-Penalty CD and How Does It Work?
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 CD, plus the flexibility of accessing your money without paying withdrawal penalties.
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A no-penalty CD lets you earn interest and allows you to withdraw your money early without paying a fee. Keep reading to learn more.
What Is a No-Penalty CD and How Does It Work?
What exactly is a no-penalty CD? A no-penalty CD is a certificate of deposit account that doesn’t charge interest if you withdraw your money before the account matures. Maturity is another word for how long the bank wants you to keep your money in the account.
Some banks and credit unions offer true no-penalty CDs. These accounts let you withdraw up to the entire amount of your balance after a short initial period. For example, Ally Bank lets you withdraw after six days for no additional fees.
Other banks specify when and how much you can withdraw. Some, including Synchrony Bank, only let you withdraw your full balance if you take your money out early. Others, such as America First Credit Union, let you make a partial or full withdrawal at certain times — once a quarter in America First’s case.
Before locking your funds away in a traditional or no-penalty CD, read all the details of the account contract to ensure 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.
For instance, 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.
What Is a No-Penalty CD Rate?
Below is a list of financial institutions with the best no-penalty CDs.
Bank | APY | Details |
|---|---|---|
Ally Bank | Term: 11 months | |
America First Credit Union | Term: 12 months | |
CIT Bank | Term: 11 months | |
Synchrony Bank | Term: 11 months |
Are No-Penalty CDs a Good Idea?
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 associated with a traditional CD, the account will likely come with a below-average CD rate, thus reducing the earning potential of the investment. For example, as of June 12, CIT Bank offers an APY of for its 6-month CD, compared to for its no-penalty CD.
However, the benefit of no penalties may outweigh the cost of the lower interest rates if 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.
No-Penalty CD Alternatives
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 CD’s term.
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 for savings accounts to give you an idea:
Ally Bank Savings:
CIT Bank Savings Connect:
TAB Bank High Yield Savings:
Synchrony Bank High Yield Savings:
UFB Direct Premier Savings:
Some of the savings accounts come from 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.
Before opening an account, make sure you compare your options. You might decide that a high-yield or online savings account serves your short-term needs better than a no-penalty CD.
Final Take
No-penalty CD accounts are enticing to depositors. A CD is often considered a low-risk investment opportunity. As long as you open your CD at an FDIC insured credit union or bank, your money will typically be safe in the case of bank failure. Besides being safe, no-penalty CDs offer depositors a bit of flexibility. You’ll be able to access your funds without facing fees. Before opening a CD account, make sure you compare rates and read all the fine print to understand when and how much you can withdraw.
FAQ
Here are the answers to some of the most frequently asked questions regarding no-penalty CDs.
What is an 11-month no-penalty CD?
An 11-month no-penalty CD would work like this – If you open it in June, it would mature the following May. But, September rolls around, and you need money for an unexpected expense. With your no-penalty CD, you can withdraw some to all of your principal without paying a fee, provided your withdrawal meets any conditions the bank or credit union has set.
When can a CD be withdrawn without penalty?
Usually CDs require both a time and funding commitment and you would have to leave your funds in the account, untouched, to avoid fees or forfeiture of interest. To get around this restriction, you can open a no-penalty CD. These CDs are offered at a variety of banks and credit unions. Before opening an account, make sure you read all the fine print and understand when and how much you can withdraw.
Which banks offer no-penalty CDs?
Ally Bank, CIT Bank and Synchrony Bank all offer no-penalty CDs.
Cynthia Bowman contributed to the reporting for this article.
Data is accurate as of June 12, 2023, and is subject to change.
Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.
This article originally appeared on GOBankingRates.com: What Is a No-Penalty CD and How Does It Work?
