Should You Consider a No-Penalty CD?

If you know only one thing about certificates of deposit, you probably know that this type of investment has a fixed period. You might put your money into a CD for nine months, a year, two years or more, but no matter which you choose, you won’t be able to access that money until that period ends—that’s the CD’s maturity date. If you need your money sooner, you’ll pay a fee.

CDs have typically been attractive savings tools because they offer slightly higher interest rates for the inconvenience of having your money locked up for the term.

But no-penalty CDs allow you to withdraw your funds at any time during the term, without charging a fee. You might also see these listed as liquid, risk-free, or access CDs. And their interest rates aren’t too different from traditional CDs.

What rates to expect from a no-penalty CD

CD rates right now range between 2.3% on the high end and 0.25% on the very low end for a one-year term. Those returns aren’t exactly thrilling: If you got a 12-month CD with a $500 deposit at 2.25%, you’d earn a whopping $11. But there’s something wonderful to be said about financial predictability, especially when you’re trying to focus on savings.

No-penalty CDs aren’t as flexible as savings accounts—you usually have to withdraw all the money at once and close that CD instead of taking bits and pieces as you need them—and they can be hard to find. Check online-only banking options if your bank or credit union doesn’t offer a no-penalty CD. Ally and Marcus by Goldman Sachs both offer them with interest rates right at 2%, for example, although Ally requires a $25,000 deposit for theirs. Marcus only requires $500 to get started.

If you’re willing to trade a bit of interest for convenience, it’s worth considering for short term savings you want to keep out of sight and mind.

Who should consider a no-penalty CD

If you have a healthy emergency fund and want to keep saving

It’s a good rule of thumb to save 3-6 months of your expenses in case of an emergency, but you don’t need to keep all that cash handy. Aside from having enough money easily accessible to get you through a car breakdown or an unexpected trip to the vet, you may want to keep that savings in a separate savings account that’s not so easy to access. Interest rates have been dropping for high-yield savings accounts, in line with interest rate reductions from the Federal Reserve. But some no-penalty CDs have rates that are as least as good as those savings accounts.

If you’re saving up for something special

The big family reunion in Hawaii isn’t happening for two years, but you know you should start saving now. Or you know you’ll want to buy a new car in the next year or two, but you’re not in a rush because it’s smooth sailing in your current car. Once you save a good chunk of money—many CDs have a minimum deposit amount like $500 or $1,000—you can stick it in a CD and watch it grow (slowly, but surely) for a year. Save up another considerable amount? You can’t continue to add to a CD like you can with a savings account, but you could open another CD.

If your high yield savings account is bumming you out

If you’ve been watching high-yield interest rates dip after the Federal Reserve adjusts rates, you may be considering jumping ship to a better offer. But a no-penalty CD could give you a competitive interest rate while still keeping your cash accessible. Instead of dealing with fluctuating interest rates that can make your return harder to predict, a CD will offer a fixed interest rate for the entire term.

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