No-Penalty CDs vs. Online Savings Accounts

An emergency fund, a home remodel, and a dream vacation are all good things to save money for. No matter what financial goal you have in mind, an important consideration is where you’re going to put all that money you’re setting aside.

A traditional savings account and/or certificate of deposit (CD) may immediately come to mind.

Traditional savings accounts can be convenient because you can add and withdraw money when you need to. However, the trade-off is that they may not offer a high interest rate (typically expressed as an annual percentage yield or APY).

Traditional CDs, on the other hand, tend to have better interest rates than savings accounts, but the commitment to leaving your money locked away for a period of time may feel too restrictive, depending on your situation.

This is why you might want to consider a no-penalty CD or a high-yield online savings account. They can be attractive options for those looking for flexibility and competitive rates. To see how each of these stacks up, read on.

A no-penalty CD operates like a traditional CD but can offer more flexibility

Traditional CDs have long been a popular way to save money. They are a type of deposit account that, depending on the term, could offer a higher interest rate than a traditional savings account.

The trade-off for the higher rate, however, is that your money may be less accessible. When you open a traditional CD, you agree to leave your money deposited for a set amount of time (the CD term). If you take money out before the end of the term, you could expect to pay a penalty.

If you need a little more flexibility when it comes to withdrawals, you may want to look into a no-penalty CD, which doesn't have early withdrawal penalties. (Hence the name.) Depending on the bank, you can typically withdraw the money beginning seven days after a no-penalty CD is funded.

In addition to providing access to your money, the no-penalty CD has an additional benefit: You can withdraw your money if interest rates go up and put it into another CD with a higher interest rate without having to wait for the term to end.

A high-yield online savings account can offer higher interest rates than a traditional savings account

An online savings account from an online bank works much like a traditional savings account. You deposit money in an account and earn interest on it. The key difference is in the interest rates. With fewer overhead costs, online banks can typically offer higher interest rates on their savings accounts than brick-and-mortar banks.

Differences between no-penalty CDs and online savings accounts

Both provide flexibility and a return on your savings, but there are clear differences that will appeal to different needs.