Certificates of deposit often offer some of the best yields you’ll find at your bank or credit union. In fact, the best CD rates currently sit at over 4% APY.
But that high interest rate comes with a tradeoff: You have to lock up your funds for a specified period of time. If you need to pull your money out in an emergency, you can expect to be hit with an early withdrawal penalty that can wipe out some or all of the interest you earned and possibly even a portion of the principal.
If you’re looking to get a solid rate with more flexibility, you may want to consider a no-penalty CD. Like a traditional CD, a no-penalty CD allows you to lock in an interest rate for a set term. However, as the name suggests, you won’t be charged a fee or lose earned interest if you choose to withdraw your money before the maturity date.
“No-penalty CDs are a nice balance between earning a great rate of return while keeping peace of mind that your money is available if you need it,” says Sheri Jackson, consumer regional manager at BOK Financial.
No-Penalty CDs vs. Traditional CDs
While most banks and credit unions offer a lineup of traditional CD products, you may have to search a little harder to find an institution where you can open a no-penalty CD.
Sometimes referred to as a liquid CD or flexible CD, no-penalty CDs usually come with terms of around one year or less and typically pay a slightly lower interest rate than a standard CD. In most cases, you can withdraw your balance penalty-free any time after the first week of opening the account.
Traditional CDs typically charge a certain number of months’ worth of interest if you withdraw your funds before their maturity date. For example, let’s say you put $10,000 into a standard 5-year CD that pays 4% APY, but imposes an early withdrawal penalty of 12 months’ interest. After two years, you would have earned about $816. If you want to withdraw your balance, you’ll be charged one year of interest, or a little over $400.
[Read: Best CD Rates.]
Pros and Cons of a No-Penalty CD
A no-penalty CD comes with several advantages and drawbacks to be aware of. Here are a few.
Pros
— The funds are liquid. The main appeal of the no-penalty CD is that you can withdraw your funds early without forfeiting a portion of your balance. This can be a major benefit if you unexpectedly need access to your funds to cover an emergency expense or if you simply want to switch to another savings product with better returns.
— There’s a fixed interest rate. With a no-penalty CD, you get to lock in your rate without having to lock up your money. This allows you to better calculate how much you’ll earn on your savings.
— Like most other deposit accounts, CDs held at federally insured institutions are protected up to $250,000.
Cons
— Interest rates are lower. A no-penalty CD generally doesn’t pay as high a yield as a regular CD. However, you can find some no-penalty rates around 4% APY, which is competitive compared to most savings products out there.
— There are fewer term options. Don’t expect to choose from a wide variety of term lengths with a no-penalty CD. Most no-penalty CDs have terms of about one year or less.
— Many banks and credit unions don’t offer no-penalty CDs, so you’re limited when shopping around for the best rates.
[Read: Best Savings Accounts.]
When Should You Choose a No-Penalty CD?
No-penalty CDs can be an ideal choice for those seeking a guaranteed rate for an uncertain timeframe.
“They work especially great for short-term goals like saving for a trip, wedding, or down payment on a home,” says Jackson. “These are situations where plans might change, and you don’t want to worry about paying a penalty.”
This type of CD can also be a solid option for storing funds while you await an investing opportunity that may offer better returns. You earn a fixed rate while maintaining liquidity, so you’re ready to move your funds when the timing is right. And they could be useful if you think interest rates will soon rise because they give you the flexibility to move into a higher-yielding CD if rates increase.
The key is not to sacrifice too much yield just to buy extra flexibility, says Jillian Stephenson, an assistant teaching professor at Carnegie Mellon University’s Heinz College and a certified public accountant.
“If you can plan ahead and know that you’re not going to need the money for certain amount of time, a regular CD might be better,” says Stephenson. “But if the rates are close, then absolutely do a no-penalty CD.”
[Read: Best Checking Accounts.]
Top No-Penalty CDs Available Right Now
Some of the top no-penalty CDs boast interest rates that rival the most competitive traditional CDs.
— Marcus by Goldman Sachs. Marcus actually offers three no-penalty CDs of various terms, but the highlight is a 13-month CD that pays 4.15% APY and requires just a $500 minimum deposit.
— Ally Bank. A great option, especially for those with limited funds, Ally pays 3.40% APY on an 11-month CD that doesn’t have a minimum deposit requirement.
— CIT Bank. This bank offers an 11-month CD with a competitive 3.50% APY. A $1,000 minimum deposit is required.
— Bank of America. Yes, the brick-and-mortar behemoth dangles a relatively generous “flexible CD” that pays 3.00% APY for a 12-month term. A $1,000 minimum deposit is required.
Alternatives to a No-Penalty CD
High-Yield Savings Accounts
Many of the best high-yield savings accounts
pay a higher APY than a no-penalty CD, and they also typically allow easier access to your funds. Plus, a HYSA gives you the option to pull out a portion of your money, while banks often require you to withdraw the full balance from a no-penalty CD.
Money Market Accounts
If you’re looking for flexibility and liquidity, a money market account might be a better option than a no-penalty CD. These accounts typically pay competitive APYs and may also allow you to write checks and use a debit card.
CD Ladder
Those looking for high interest rates and flexibility could also benefit from setting up a CD ladder, says Stephenson. This involves spreading money across multiple CDs of varying terms. When each CD matures, you can choose to renew it or put the funds toward another purpose while taking advantage of the higher rates on longer-term CDs.
“That way you continuously have access to money,” says Stephenson.
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No-Penalty CDs: How to Earn Higher Interest with More Flexibility originally appeared on usnews.com
Update 09/25/25: This story was previously published at an earlier date and has been updated with new information.
