What Is a No-Penalty CD? (2024)

CDs have some big advantages like generous interest rates and a guaranteed rate of return. But they come with one big drawback: Once you buy a CD your money is locked up until it matures.

No-penalty CDs attempt to solve this problem. They eliminate the penalties you normally pay if you need to cancel a CD and withdraw your money early, creating—at least in theory—a best-of-all-worlds financial instrument.

With interest rates higher than they have been in years, CDs are a particularly appealing investment right now for many savers. A no-penalty CD could allow you to lock in rates, while protecting you if rates continue to rise—or if you simply decide you need the money.

No-penalty CDs do come with trade-offs, the biggest of which is often a slightly smaller yield compared to traditional CDs. You “accept a lower interest rate and the flexibility to get your money out early with no penalty” with a no-penalty CD, says Robert Pagliarini, president of Pacifica Wealth Advisors, an Irvine, Calif.-based wealth-management firm. “Or you choose a higher interest rate but risk paying a penalty.”

If you are attracted by today’s high interest rates, but unsure whether to commit your money for months or years, a no-penalty CD could provide a middle option.

How do no-penalty CDs work?

No-penalty CDs are opened and funded the same way as conventional CDs. The difference is that anytime after the first six days of opening and funding your CD, you can pull your money out without having to pay the penalty fee that traditional CDs levy on early withdrawals. (For both regular and no-penalty CDs, federal law mandates that people who close a CD within a week of opening it will have to pay a penalty of at least seven days’ worth of interest.)

In general, paying a CD penalty means sacrificing some of the interest you would have otherwise earned. Penalties are usually defined as a certain number of months’ worth of interest and the longer the CD term, the more months of interest you have to give up if you break the CD. For example, a short CD of six or nine months might charge a penalty of two months’ interest, while a three- or four-year CD might charge an entire year’s worth.

While most CD penalties only take away interest you have already accumulated, if you withdraw from or close out a CD shortly after opening it—before the money has had time to accrue much interest—you could find that paying a penalty fee eats into your principal.

No-penalty CDs can be especially useful when interest rates are rising, because if rates jump, you have the option of pulling your money out and reinvesting into a higher-yielding product. (One caveat: Some banks specify that their high-yield CDs can’t be funded with money already held at that institution.)

Just make sure you know what you have to do to close out a no-penalty CD early, as well as how long the process should take. “Some banks don’t make it really easy to cancel the no-penalty CD,” says Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts.

For instance, Tumin says, closing the CD might entail a phone call to customer service, even if you opened the CD online, and transferring your money to a different bank might not be instantaneous. “If you have some immediate need for those funds, it sometimes takes a while,” he says.

How do no-penalty CD rates compare to regular CD rates?

The main trade-off with no-penalty CDs is they tend to have lower APYs than conventional CDs with similar terms. “There is a cost, and that’s a reduced rate,” says Edward Mendlowitz, East Brunswick, NJ-based emeritus partner at accounting firm Withum.

No-penalty CD rates at some banks are nearly a percentage point lower than rates on conventional CDs, while the best no-penalty CD rates are very close to what you could earn with a traditional CD.

Many no-penalty CD rates are in a similar range today as high-yield savings accounts. If you’re considering a no-penalty CD, check current high-yield savings rates to see if you could earn a similar amount by opening a savings account.

If the two are comparable, consider the pros and cons of each: Savings account APYs aren’t locked in like CD rates and can fluctuate, but you have more flexibility when it comes to moving money in and out of the account. Taking money out of a no-penalty CD effectively means closing out the account, but with a savings account, you can make a withdrawal and then replenish those funds.

There is less variety in maturities of no-penalty CDs, and they tend to be short-term: Many banks that offer no-penalty CDs offer only a single maturity term, with 11-month no-penalty CDs especially prevalent. And although many banks today offer no minimum deposit CDs, some no-penalty CDs do have minimums as high as $1,000.

Banks that offer no-penalty CDs

Not all banks offer no-penalty CDs, but we’ve found a number offered by major online banks. Before opening a no-penalty CD, make sure your money will be covered by FDIC insurance or, if the issuer is a credit union, by the National Credit Union Administration.

Ally no-penalty CD

Digital bank Ally is Buy Side’s pick for best online bank for a number of reasons: It offers competitive interest rates on both checking and savings accounts, it doesn’t charge customers annoying fees and its mobile app and website are easy to navigate and use.

In addition to regular CDs with terms ranging from three months to five years, Ally also offers a step-up CD that lets you increase your APY, plus a no-penalty CD. The Ally bank no-penalty CD has no minimum deposit.

Ally no-penalty CD details:

•FDIC insured

•11-month term

•No minimum deposit

•Roughly half a percentage point lower than Ally’s highest yield on a traditional CD

Marcus no-penalty CD

While Marcus might not be a household name, its corporate parent Goldman Sachs is one of Wall Street’s best-known investment banks.

Marcus won’t replace your everyday bank—it doesn’t offer a checking account, for one thing—but its competitive rates on high-yield savings and CDs make it worth a look

Marcus offers traditional CDs with terms ranging from six months to six years in addition to no-penalty CDs. It also recently began offering a step-up CD that lets you increase your interest rate.

Marcus no-penalty CD details:

•FDIC insured

•13-month term (7-month and 11-month terms also available with a lower APY)

•$500 minimum deposit

•Toughly 1 percentage point lower than Marcus’s highest yield on a traditional CD

CIT no-penalty CD

Last year, CIT Bank became a division of First Citizens Bank (which has been in the news lately for taking over the remains of failed Silicon Valley Bank under an agreement with the FDIC). The online-only brand offers checking as well as multiple high-yield savings accounts.

In addition to its no-penalty CD—which has the highest APY of the no-penalty CDs we’ve researched—CIT also offers traditional CDs with maturities ranging from six months to five years.

CIT no-penalty CD details:

•FDIC insured

•11-month term

•$1,000 minimum deposit

•Roughly a quarter percentage point lower than CIT’s highest-yielding regular CD

Synchrony no-penalty CD

Synchrony Bank is best-known as an issuer of store credit cards, but its online banking division offers competitive yields on CDs and savings accounts. In addition to a no-penalty CD, Synchrony offers conventional CDs with terms from three months to five years, and a two-year step-up CD. All of Synchrony’s CDs have no minimum balance.

Although Synchrony doesn’t offer a checking account, it does have a high-yield savings account. And right now, the APY on that account is almost identical to the APY on its no-penalty CD.

Synchrony no-penalty CD details:

•FDIC insured

•11-month term

•no minimum deposit

•roughly 1 percentage point lower than Synchrony’s highest-yielding regular CD

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