But if CDs are your investment of choice, keep in mind that there’s not always a penalty for withdrawing your money before your account matures.
Some banks offer no-penalty CDs. They’re also known as liquid CDs or breakable CDs.
What is a no-penalty CD?
Thinking to yourself, what is a no-penalty CD? What is a breakable CD?
No-penalty or breakable CDs are time deposits without an early withdrawal penalty. Generally, they allow account holders to make fee-free withdrawals as early as seven days after the CD has been funded.
Having a no-penalty CD can be convenient. You can earn more interest than you would through a savings or money market account and you can withdraw your savings at any point without facing any consequences.
Penalties for early CD exits can sting
Early withdrawal penalties can be costly for consumers. Savers often lose 180 days’ interest for cashing out their CDs before they mature.
Penalties for short-term CDs are usually less strict, but an early exit could still cost you as much as 90 days’ interest. Do the math. Depending on how much interest you’re expecting to earn, you’re probably better off waiting until your CD comes due to withdraw your deposit.
Sometimes, however, you can’t leave your savings tied up in a CD until the end of the term. In the event of an emergency, you may need access to your money right away.
That’s the beauty of a no-penalty CD — you have the freedom to tap into your account whenever you need extra cash. And as rates rise, a no-penalty CD won’t keep you from taking advantage of a better deal with a higher yield.
Are CD rates locked in?
No-penalty CDs, like traditional CDs, are typically fixed-rate accounts. CD rates are normally locked in. That means the yield tied to your account likely won’t change and you can expect to earn a set amount of interest.
Any bank offering a CD will note in its fine print that with an early withdrawal, an account holder will earn less interest. The same is true for no-penalty CDs. While you’ll have the option of making a penalty-free withdrawal, the amount of interest you’ll end up with will be lower than if you left your deposit tied up in your CD for the entire term.
Which banks offer no-penalty CDs?
A no-penalty CD may sound like a great product, but they’re hard to find. Few banks and credit unions offer them. That’s always been the case, says Greg McBride, CFA, chief financial analyst for Bankrate.com.
“Like umbrellas on a rainy day, you tend to see them when interest rates are rising, much more so than when interest rates are falling,” McBride says. “But even in a rising rate environment, they’re still a bit of a niche product.”
Banks offering no-penalty or breakable CDs to consumers include:
With Ally Bank’s no-penalty, 11-month CD, the amount of interest you can earn depends on the size of your deposit. For example, a $25,000 deposit is required for savers who want the best rate (2.3 percent APY). You’ll need $5,000 to earn 2.15 percent APY.
CIT Bank’s no-penalty CD pays 2.05 percent APY for a $1,000 minimum deposit. The bank touts it as a product for consumers looking for a secure place to put their savings without sacrificing liquidity.
“CIT’s 11-month CD is a smart option for those who want a safe, flexible way to create more value with their savings,” says Ravi Kumar, head of internet banking for CIT.
Marcus by Goldman Sachs is one of the latest banks to begin offering no-penalty CDs. Savers can choose between three different terms (seven months, 11 months and 13 months). The 11-month and 13-month CDs pay 2.3 percent and 2.35 percent APY, respectively. The minimum deposit is just $500.
There are trade-offs
An old adage says that if something seems too good to be true, it probably is. With no-penalty CDs, that’s often what consumers find.
While you can withdraw the money from your no-penalty CD within days of funding your account, the amount of interest you can earn may be relatively low. While the top 11-month no-penalty CDs pay around 2.3 percent APY, the top 12-month traditional CDs in 2019 pay 2.85 percent APY.
“You do pay for the convenience, being able to tap into the money prior to maturity,” McBride says.
|Live Oak Bank||2.85%||$2,500|
Compare the best no-penalty CDs to other high-yield certificates of deposit.
Not so carefree after all
There’s another issue with no-penalty CDs: Too often, they aren’t as carefree as their names imply. You can withdraw funds before the CD matures without penalty, but you may not be allowed to make partial withdrawals. If you need a portion of the money in your no-penalty CD, you may have to close out the entire account. One exception is Citizens Bank, which has a 24-month CD that permits a one-time full or partial withdrawal without penalty.
No-penalty CDs usually don’t allow account holders to make multiple deposits. Savers who want to add or withdraw money from their accounts whenever they need it should consider a high-yield savings or money market account. Today’s best liquid deposit accounts pay a higher interest rate than the best no-penalty CDs.
Bottom line: Before you open a no-penalty CD, you’ll need to do some comparison shopping. See how the interest rates stack up and calculate how much interest you could earn based on the amount of money you plan to park in your account.
You should also look at other types of CDs. Add-on CDs, for example, pay a high yield and allow consumers to make more than one deposit.