No-penalty CDs: Good deal or not?
By Laura Bruce • Bankrate.com

No-penalty CDs allow money to be withdrawn without penalty and offer the consumer liquidity, convenience and, in a rising rate environment, an opportunity to take advantage of better rates. The drawback is that often the interest rate is considerably less than you'd get on a regular CD of the same term. But that can be OK when you're fairly sure rates will rise and you're willing to pay a premium to take advantage of that.

On the flip side, in a falling rate environment, a no-penalty CD gives you a guaranteed rate and the ability to access your cash versus, say, a money market account where the rate can change. Nevertheless, if you buy a no-penalty CD simply because you want the safe haven that CDs provide, but you also want access to your money, be sure to explore all your options to see if you're getting the best deal.

No-penalty CDs go by various names and they may have very different terms and stipulations, but the premise is pretty much the same: You can withdraw money without paying a penalty.

Shop around
Washington Mutual offers a 10-month "Liquid CD" that requires a $5,000 deposit. The annual percentage yield, or APY, is 1.25 percent* for balances below $25,000. You can withdraw funds as long as you maintain the $5,000 minimum balance.

WaMu's traditional 10-month CD pays the same yield but requires a minimum deposit of $1,000. So, instead of giving up yield for the privilege of being able to prematurely withdraw money, the trade-off is that you're required to keep an additional $4,000 in the account. WaMu doesn't have a 10-month online CD, but the eight-month and 12-month online CDs pay 3 percent and require just a $1,000 deposit.

PNC's "Ready Access CD" requires a $1,000 deposit and has two terms: three months at 1.45 percent and 12 months at 1.55 percent. The bank's regular three-month and 12-month CDs pay 1.61 percent and 1.76 percent, respectively.

"Customers tend to like these products if they're looking for an interest rate with no risk or moderate risk," says PNC spokesman Fred Solomon.

Bank of America is somewhat unusual in that, as of this writing, its "Risk Free CD" pays more interest than its standard CD. The no-penalty CD has a nine-month term and an APY of 2.4 percent, versus the bank's regular six-to-11-month CD, which has an APY of 1.6 percent.

Jonathan Wilk, deposit balance growth executive with Bank of America, says the no-penalty CD has been available for a number of years and is very popular with customers.

"It offers a value proposition that delivers a strong rate but with access to liquidity and, particularly at this time in the market, that's very important to customers."

Bank of America's "Risk Free CD" requires a $5,000 deposit, versus the $1,000 minimum deposit for the standard CD. Additionally, you must have another deposit account, such as a checking or savings account, with the bank to take advantage of the no-penalty offer. The early withdrawal penalty is waived only if the amount withdrawn is deposited into a second Bank of America deposit account. The money doesn't have to stay in the second account for a specified amount of time; it can be withdrawn immediately. For that reason, it appears that the requirement may be to encourage CD fans who to have been known to flit from one bank to the next for the best deals, to have a more "permanent" relationship with Bank of America.

Wachovia's "Liquid CD" requires a $5,000 minimum opening deposit and has three terms available: three months, five months and 10 months. The APY on the two shorter terms is 1.07 percent; the 10-month CD has an APY of 1.93 percent. The account allows a maximum withdrawal of $500 every seven days.

Beware withdrawal restrictions
While most banks allow withdrawals seven days after the account is opened, some have much more stringent stipulations -- for example, a 90-day waiting period. It pays to shop for not only the best yield, but for terms and requirements that suit your needs.

Additionally, check other options such as high-yield CDs of shorter durations. If you're looking at six-month to 12-month no-penalty CDs but are quite sure you won't need your money for three months, then consider a high-yield three month CD that doesn't have the no-penalty feature but pays double or triple the yield. You could roll over the CD when it matures if that still suits your cash availability needs and if the yield makes it worthwhile.

High-yield money market or savings accounts may also work in this situation. You have total liquidity but lose the guaranteed rate. But consider this: Many institutions consistently offer high-yield money market accounts. The return may make it worth the risk.

*All rates and yields are as of the date the article was written.