No-Penalty CDs vs. Online Savings Accounts: What’s the Difference?
Both provide flexibility and a return on your savings, but there are key differences that will appeal to different needs.
An emergency fund, a home remodel, a dream vacation - no matter your financial goals, 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.
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, a 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 APY 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 works much like a traditional savings account. You deposit money and earn interest on it. The key difference is in the interest rates. With fewer overhead costs, online banks can typically offer higher rates on their savings accounts than brick-and-mortar banks.
Differences between no-penalty CDs
and online savings accounts
No-Penalty CD
Online Savings Account
|
No-Penalty CD |
Online Savings Account |
|
|---|---|---|
|
Interest rates |
You lock in the interest rate for the full term. That means that even if CD interest rates decline, you wouldn't earn less of a return. |
Interest rates are variable. Your account’s interest rate could go up or down. |
|
Withdrawals |
You can typically withdraw money as soon as 7 days after funding though rules may vary at different banks. And you usually have to take out your entire balance – there are no partial withdrawals. |
You can take out as little or as much as you want from a savings account. Withdrawals may be limited to 6 per month, depending on your bank and the type of withdrawal you make. |
|
Minimum deposits |
The minimum deposit for no-penalty CDs varies from bank to bank. |
Typically a low or no minimum deposit is required to open an account. |
Using different savings accounts to reach your financial goals
Different savings accounts offer different benefits, so when you’re putting together your savings strategy, it’s important to consider your needs and goals.
- What are you saving for?
- What’s the timeline of your goal(s)?
- What kind of flexibility do you need when it comes to accessing your cash?
While each person’s financial situation is different, you’ll likely find that you want to use a combination of different savings vehicles for your goals. For instance, rather than choosing between a no-penalty CD and high-yield online savings account, you may decide to use both – each designated for a specific goal.
Saving for a major purchase
Whether it’s a down payment for your first (or second) home – or another major purchase – you’ll need the right savings accounts to support your goal.
A no-penalty CD can be a great place to put your money to work, earning a competitive APY as you search for that dream home. If the right home comes along, you can access your money before the end of the CD term without penalty.
If you don’t need to crack open your CD early, you can let your money grow at a guaranteed rate until maturity, then use it for your down payment – or roll it over into a new CD.
…while staying on top of your everyday savings
No matter what you’re saving for – we all need a solid emergency fund for life’s unexpected turns. You can build your everyday savings with a high-yield online savings account – where you can easily add or withdraw money and earn a higher APY than a traditional savings account.
Keep your money working for you even after you’ve retired
- With a fixed APY, you have the confidence of a guaranteed rate of income – even during periods of economic uncertainty.
- You can employ a CD strategy like laddering, where you fund several CDs at once, with terms that mature on a staggered basis.
- That way, your money becomes available on a rolling basis as each CD matures, providing a predictable stream of supplemental income during retirement.
- Another perk of CD ladders? You’re able to take advantage of rates on longer-term CDs, which are typically higher (vs. short-term CDs), without committing all of your money to that CD.
Read more: How to build a CD ladder
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this website were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.
3 min read
