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What Is a No-Penalty CD?


Written by Sarah Berger | Published on 7/9/2020

 

A no-penalty CD is a type of savings account that allows depositors to lock in an interest rate for a specified period of time while giving them the added benefit to make either a partial or full withdrawal of their funds before that time is up. Unlike traditional CDs, no-penalty CDs do not have early withdrawal penalties. 

Because of this unique combination of benefits, no-penalty CDs are the diamonds of deposit products — relatively rare and valuable.

In this article we will cover:

What is a no-penalty CD?

A no-penalty CD offers many of the same benefits as traditional CDs, while still giving depositors the liquidity that is often reserved for savings accounts. No-penalty CDs are only offered by a handful of banks and credit unions, as they combine a locked-in interest rate with no penalties if you break your term early.

The rules vary from CD to CD, though. Generally, you can withdraw your funds in full with no penalty starting around a week after funding. Some no-penalty CDs allow for a certain number of partial withdrawals, while others don’t allow depositors to make partial withdrawals.

Like traditional CDs, no-penalty CDs dole out a fixed interest rate on funds until the CD reaches maturity, while also providing FDIC insurance (or NCUA insurance, with a credit union). No-penalty CDs can come in a variety of term lengths — called maturities — that can range from a number of months to years.

No-penalty CDs vs. traditional CDs: What’s the difference?

The key difference between a no-penalty CD and a traditional CD is exactly what its name suggests: No-penalty CDs, unlike traditional CDs, do not penalize depositors for withdrawals made before the CD reaches maturity.

Type of CD  Fixed rate  Interest earning  FDIC-insured Early- withdrawal penalties 
Traditional CD
No-penalty CD

Pros and cons of no-penalty CDs

Pros

  • Increased flexibility by avoiding early withdrawal penalties: The centerpiece of a no-penalty CD is that it solves the main problem associated with traditional CDs — hefty early withdrawal penalties. By allowing depositors to make either full or partial withdrawals of their funds without having to sacrifice any interest earned as a penalty, no-penalty CDs offer a higher level of liquidity. This has the potential to save depositors a significant amount of money, as the average early withdrawal penalty for a 1-year CD in 2019 was a stunning 119 days of interest. 
  • Interest rates that typically out-yield savings rates: While the rate of return on no-penalty CDs pales in comparison to that of investments, their APYs still often outpace those of other deposit accounts, like money market accounts, savings accounts and checking accounts. The average APY of a typical savings account, for example, was recently pegged at 0.201%, while recent no-penalty CD rates have climbed to 1.20%.
  • Low risk: The beauty of CDs in general is that they pose low risk as a deposit product, allowing you to grow your funds in a safe way. No-penalty CDs are FDIC-insured up to $250,00 per depositor, per FDIC-insured bank. Unlike investments, you are guaranteed to get back your principal, along with any interest you earned when you locked in your rate.  

Cons

  • Lower APYs than traditional CDs: If your main priority for a CD is to maximize interest earned, and you don’t intend to make any early withdrawals, a traditional CD might be a better fit. In general, no-penalty CDs have lower APYs than their traditional counterparts. As of June 12, 2020, the highest rate for a 11-month, no-penalty CD was 1.10%, while for a one-year, traditional CD it was 1.61%.
  • Full withdrawal restrictions: One of the biggest drawbacks of no-penalty CDs are that they are often a one-and-done type of deposit product, requiring you to make only one, initial deposit and allowing you only one full withdrawal. While this is not the case for all no-penalty CDs, many of them do require you to withdraw your full amount (if you choose to withdraw early) and then close your account.  
  • Offered in shorter terms: If you want to open a CD with a longer term length, you will have trouble finding a no-penalty CD that fits your needs. The terms for no-penalty CDs tend to be significantly shorter than traditional CDs. While traditional CDs can have terms of up to seven years, most of the term lengths for no-penalty CDs max out at around one year.

Which banks offer no-penalty CDs?    

No-penalty CDs can be hard to find, and they often aren’t in a financial institution’s product lineup. However, the following banks are currently offering no-penalty CDs:

Bank  Term  APY  Minimum Deposit
Marcus by Goldman Sachs 7 months  1.00% $500
CIT  Bank 11 months  0.75%  $1,000
Ally Bank 11 months  0.95% $0
Citizens Access 11 months  0.75% $5,000
APYs are accurate as of June 12, 2020

Opening a no-penalty CD 

The process of opening a no-penalty CD is similar to opening a traditional CD. There isn’t as much pressure when selecting the term length, though, because you will not be penalized if you have to withdraw your funds early.

In addition to the CD’s interest rate and term length, you should also take the following factors into consideration when opening a no-penalty CD: 

  • Withdrawal rules: Not all no-penalty CDs are equal, and while some might offer you to make partial withdrawals multiple times, others only allow you to withdraw your full amount once — and then will close your account. Review the withdrawal rules carefully when selecting a no-penalty CD.
  • Renewal rules: As is the case with traditional CDs, when your no-penalty CD matures, it is often automatically renewed and rolled over into a new CD (although your bank or credit union is required to give you prior notice beforehand). You might want to consider a CD that gives you an extra incentive to renew. For example, Ally Bank is currently offering a 0.05% Loyalty Reward for CD renewals.

Should I invest in a no-penalty CD?

Of the array of CDs that are out there, no-penalty CDs are the crown jewel — especially in a fluctuating rate environment. 

No-penalty CDs allow you to lock in a rate that you find favorable, will typically reward you with higher interest rates than other deposit products and won’t penalize you if you do find yourself needing to make an early withdrawal. This can be especially strategic if interest rates start to rise, as you can withdraw your funds early and deposit them in a CD with a higher rate, while not forfeiting any of the interest you earned. 

However, if you’re specifically looking for a CD that offers maximum interest or a longer term, you will likely be better off with a traditional CD, as the trade-offs for the flexibility of no-penalty CDs are lower rates and shorter terms.

Comments
Buckeyes
  |     |   Comment #1
I like this write-up. I am a savings account bear and decided to lock in my remaining savings into Ally's .95% rate figuring the mad dash to .75% or lower is happening soon. The weird part to all this is banks actually like when rates go up, as it gives them more room to play. Of course this means the Fed funds rate isn't 0 as well. I just cannot believe how bad savers are getting crushed, and no one seems to care. I am retired and I am falling behind more and more each day. But yes, nice write-up. Thanks.

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