What Is a No-Penalty CD and How Does It Work?
A no-penalty CD offers a simple way to earn interest on your savings with some added flexibility.
Ready to add a Marcus no-penalty CD to your savings strategy?
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
FDIC-Insured – Backed by the full faith and credit of the U.S. Government. Goldman Sachs Bank USA, Salt Lake City Branch.
When you open a traditional CD account, you agree to leave your money deposited with the bank for a certain period of time (aka, the CD term). At the end of the term, you can expect the return of your principal along with any interest accrued during that period.
A no-penalty CD, on the other hand, allows you to withdraw your money before the end of your CD term – without having to pay a penalty.
Let’s take a closer look at how no-penalty CDs work.
Benefits of a no-penalty CD
No-penalty CDs can offer withdrawal flexibility
When you open a CD, you’re planning to leave your money in the account for a set term in order to earn a higher APY (compared to a traditional savings account). While no one sets out to open an account with an eye toward early withdrawal, life happens. And you may need to tap your funds sooner than expected.
This is when having a no-penalty CD, which offers penalty-free early withdrawals (usually beginning after seven days of funding), can provide peace of mind for savers looking to have a little more flexibility.
No-penalty CDs can be attractive when interest rates change
The APY offered on CDs and other savings products tend to change when Federal Reserve lowers or raises its federal funds rate. A no-penalty CD can be helpful in either scenario because they typically come with a fixed rate and flexible withdrawals.
For instance, if interest rates were on the rise, you could take out your money from your no-penalty CD before the maturity date and move the funds into a new CD with a higher APY. This flexibility essentially allows you to take advantage of rising interest rates.
On the flip side, if interest rates were to fall, you could leave your funds in the account with the peace of mind in knowing that your money is earning a higher fixed rate.
Snapshot:
A no-penalty CD in action
Saving for when opportunity knocks. Let’s say you’re planning a dream vacation abroad next year, and you want to earn a higher APY with the excess cash sitting in your savings account. You could open a 7-month no-penalty CD, lock in an APY, and watch your money grow.
The fixed rate can help protect your money from interest rate fluctuations, while giving you the flexibility to withdraw your money if an unexpected expense or opportunity arises (e.g., early flight or hotel deals).
With a no-penalty CD, you can save for the future, earn a competitive rate on your deposit, and know that your money is accessible in the event of an emergency or unexpected opportunity.
Things to keep in mind with a no-penalty CD
Traditional CDs tend to offer higher APYs
The withdrawal flexibility of a no-penalty CD comes with a trade-off: Their APY tends to be lower than what you could get with a traditional CD (one that doesn’t allow for early withdrawals). That being said, the APYs on no-penalty CDs are still usually higher than those offered by traditional savings accounts.
No partial withdrawals
Being able to take out your funds before the maturity date without penalty is a big draw for no-penalty CDs. However, you usually have to take out your entire balance at once. For example, if you have $5,000 in a no-penalty CD and need to tap that money before the end of your CD term, you must take out the full balance. There are no partial withdrawals.
If you want a deposit account that you can continuously withdraw and add funds to, you may want to consider putting your money into a high-yield savings account instead.
Opening a
no-penalty CD
Many banks offer no-penalty CDs. If you’re interested in opening an account, it’s a good idea to do some research and comparison shopping. Account features and terms vary from bank to bank, so make sure you get the details.
Here are a few questions to ask before opening an account:
- What is the APY and CD term?
- Is the account FDIC-insured?
- Is there a minimum opening deposit or account fees?
- Are there any withdrawal restrictions?
Quick comparison: traditional CDs vs. no-penalty CDs
Traditional CD
No-penalty CD
|
Traditional CD |
No-penalty CD |
|
|---|---|---|
|
Fixed rate |
Yes, most traditional CDs come with a fixed rate. Check with your bank to confirm |
Yes, most no-penalty CDs come with a fixed rate. Check with your bank to confirm. |
|
FDIC insured |
Yes, if you open an account at a FDIC-member bank. |
Yes, if you open an account at a FDIC-member bank. |
|
Early withdrawal penalty |
Yes – fees can vary depending on the CD term and your bank. Typically, the shorter the CD term, the less penalty you’ll have to pay for withdrawing early. |
No penalty fees typically when you withdraw the total balance beginning seven days after funding. |
Is a no-penalty CD right for you?
A no-penalty CD gives you a simple way to earn interest on your savings with some added flexibility when compared to a traditional CD. Any savings account should ultimately work for whatever your savings goals may be. Depending on your needs, a no-penalty CD might check all those boxes. As you consider your options, you’ll likely find that you’ll need to use a combination of different savings vehicles for different goals.
Ready to add a Marcus No-Penalty CD to your savings strategy?
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.
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