What are no-penalty CDs?

A no-penalty certificate of deposit (CD) allows you to withdraw money early without paying a penalty. The annual percentage yield (APY) is usually lower than for regular CDs, but still potentially worthwhile.

Derek Silva

Derek Silva

Published May 16, 2019

KEY TAKEAWAYS

  • Most no-penalty CDs allow only partial withdrawals or a full withdrawal.

  • APYs are lower than regular CDs.

  • A high-yield savings account may be a better option.

CDs are a popular tool to build savings because they offer better interest rates than traditional savings accounts. The challenge with a CD is that if you withdraw your money before the end of the term, you’ll pay a big penalty. So if you put money into a one-year CD, you have to wait until the end of that year to access it.

Removing money early results in an early-withdrawal penalty that could amount to three months' worth of interest or more. This fee makes CDs impractical if you think you’ll need access to your money before the end of the term. That’s where no-penalty CDs come in.

In this article:

What is a no-penalty CD?

A no-penalty CD allows you to withdraw money before your CD reaches maturity (the end of the CD term). You may also see the term “breakable CD.”

No-penalty CDs basically function like regular CDs. You choose a term length, make an initial deposit, and then your CD will earn interest over its term. When the term ends you have a grace period (usually one week) to withdraw money, deposit more, close your account without fees, or renew your CD.

The major difference is that when you withdraw money early from a regular CD, you have to pay an early-withdrawal penalty. The penalty amount varies but you can expect to pay three months’ worth of interest or more. CDs with longer terms usually have higher penalties. Because of the penalty, removing money early from a CD often isn’t worth it.

No-penalty CDs aren’t very common because they’re less desirable for banks than regular CDs, which give banks assurance that your money will be deposited for the full term length.

Are there any restrictions on withdrawals?

One typical feature of no-penalty CDs is that you can only make partial withdrawals or a full withdrawal. That means you could find yourself in a position where you only need a little bit of the money in your CD account, but you still have to withdraw the entire balance. This varies by bank and by CD so make sure to review the terms of your CD before you open an account.

Banks may also restrict the number of withdrawals you can make. For example, some CDs allow just one partial withdrawal. Others allow you to withdraw money only within a certain amount of time, such as within the first few months of your term.

Note that almost no CDs let you withdraw money within the first seven days of your term. So if you need money right after you open the CD, you have to wait.

Rates for no-penalty CDs vs. regular CDs

When you open a CD, you lock in the APY (interest rate) upfront. This is true for no-penalty CDs and regular CDs. However, the flexibility of no-penalty CDs does come at a bit of a price: The interest rates are usually lower than the rates for regular CDs.

The interest rates are still higher than a traditional savings account, but in some cases, you’ll find that high-yield savings accounts offer better rates than no-penalty CDs. A regular savings account also offers more flexibility in terms of withdrawals and deposits than a CD.

If you are considering a no-penalty CD, look for a longer term length. Longer terms usually have the highest rates and since you can withdraw your money if you need to, there’s no real disadvantage.

As with any CD, banks occasionally offer special rates, which could be one way to get a no-penalty CD with the highest possible interest rate.

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Minimum deposits for no-penalty CDs

Minimum deposit requirements for no-penalty CDs are usually the same as a bank’s regular minimums. In some cases, the minimum will be higher. Banks will also require you to maintain the minimum balance. That means you can’t withdraw money if it will push your account balance below the minimum.

Should you get a no-penalty CD?

If you think you’re going to need regular access to your money, you should just look for a savings account or a money market account. No-penalty CDs have lower rates than regular CDs, and you can probably find a savings account with a better rate. Savings accounts also give you more financial flexibility because you can withdraw or deposit money basically whenever you want.

The one caveat here is that the savings accounts with the highest interest rates are usually online banks. These banks are basically the same as traditional banks and your money is just as secure, but there aren’t any physical branches you can visit. Some still provide a debit card, which is enough for many people.

If you don’t think you’ll need access to your money before the end of your term, a no-penalty CD probably isn’t necessary. But if you still don’t feel confident locking all your money into a CD, consider CD laddering. Laddering is a strategy where you spread your money over multiple CDs that have staggered maturity dates. This gives you regular payouts as CDs reach maturity, but you’re still earning higher interest than if you had your money in a savings account.

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