What Is a No-Penalty CD and How Does It Work?

Unlike a traditional CD, a no-penalty CD allows you to withdraw your money after a certain period without having to pay a penalty.

If you're worried about committing to a traditional CD (in which your money is locked up for a set period), a no-penalty CD may be a good option because it offers more withdrawal flexibility when you need to access your funds.

No-Penalty CDs are can be attractive when interest rates change

Interest rates on CDs and other savings products tend to change when the Federal Reserve lowers or raises its federal funds rate.

A no penalty-CD can be helpful in either situation because they typically come with a fixed rate, and you have the ability to take out your money without paying a penalty.

So when interest rates are on the rise, you can move your money to a higher-yielding CD, before your no-penalty CD matures. On the flip side, when interest rates fall, you have the security of knowing your money is still earning a higher fixed rate.

Opening a no-penalty CD

Not all banks offer no-penalty CDs. If you’re looking to open an account, it’s a good idea to do a little research and comparison shopping. 

Account terms vary from bank to bank, so make sure you understand the details. Some key things you’ll want to look out for before opening an account:

• Is the account FDIC-insured?
• Is there a minimum opening deposit?
• What is the APY?
• Are there any withdrawal restrictions?

Pros of a no-penalty CD

Ready access

No one sets out to open a CD with an eye toward early withdrawal. But life happens and knowing there's an option to withdraw your funds early can provide a peace of mind. With a no-penalty CD, you can save for the future, earn interest on your deposit, and know that your money is accessible in the event of an emergency.

Interest rates

Without early withdrawal penalties, no-penalty CDs give you the ability to take advantage when interest rates rise.

Here’s why: If you open a five-year CD and rates rise during that time, you may miss out on the opportunity to take advantage of the rising rates because your money is locked up. But if you had that money in a no-penalty CD, you could easily withdraw it and move your money into a new CD that offers a higher APY.

Cons of a no-penalty CD

Regular CD rates tend to be higher

While a no-penalty CD offers flexibility with withdrawals, the APY tends to be lower than what you could get with a traditional CD (one that doesn’t allow for early withdrawals).

Good to know: Rates on no-penalty CDs are typically higher than those offered by traditional savings accounts.

No partial withdrawls

A big draw for no-penalty CDs is being able to withdraw your funds early. However, generally speaking, if you want to take out your money early, you’d have to withdraw your entire balance at once.

So if you have $5,000 in a no-penalty CD and need access to that money before it matures, you have to withdraw your full balance. There are no partial withdrawals.

If this is a deal-breaker for you and you want an account that you can continuously withdraw and add funds to, you might consider putting your money into a high-yield savings account instead.

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. And that flexibility can help you navigate changing rates.

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.