What Is a Liquid Certificate Of Deposit?

Liquid certificates of deposit are a type of certificate of deposit (CD) that allow investors to make withdrawals without incurring a penalty. The funds in the account are accessible throughout the lifetime of the product where most traditional CD's apply a hefty fee for withdrawing early, reducing the interest earned to that point. But investors can't have their cake and eat it too. Liquid CD's often offer lower rates than a traditional CD, meaning they sacrifice yield for greater flexibility.

Key Takeaways

  • Liquid certificates of deposit are a CD type that allow investors to make withdrawals without incurring a penalty.
  • Liquid CDs offer lower rates as compared to traditional CDs.
  • Alternatives to liquid CDs in the market include money market accounts and bank savings accounts.

Understanding a Liquid Certificate Of Deposit

Liquid certificates of deposit allow holders to make a withdrawal before the maturity date but not without providing the institution with advanced notice. It's not as simple as making a withdrawal from a checking account.

Some banks or credit unions require a week's notice while others need as much as 30 days. In many cases, there is also an initial lock-up period where investors can't make a withdrawal in the first week of the fund. That prevents day trading type behavior often prevalent in the stock market. Furthermore, liquid CDs frequently have limits on the amount that can be withdrawn at a given point in time. Some banks permit 100% of the funds to be withdrawn in one transaction while others have more stringent requirements. It can be a minimum percentage of the initial deposit or simply a minimum dollar amount.

Penalty-free withdrawals marketed by liquid certificates of deposit can also be a ruse to draw investors in. For example, liquid CDs often restrict the number of penalty-free withdrawals. Liquid CDs also have higher minimum investment amounts that do not provide the same yields as compared to other, relatively less-liquid instruments.

Breaking these rules can result in withdrawal penalties comparable to a traditional certificate of deposit. Investors interested in a liquid certificate of deposit should remember to read all the terms and condition of the product which plainly state the different withdrawal requirements and minimum account size.

Alternatives to Liquid Certificate of Deposit

Some investors enjoy the flexibility of a liquid CD. It provides quick and easy access to interest-bearing funds in the event of an emergency. That way you don't necessarily need a huge cushion and idle cash sitting in a savings account.

Liquid CDs aren't for everyone, though. In this case, there are plenty of other solutions that satisfy various financial goals. One option is to purchase a traditional certificate of deposit that offers better returns but less flexibility. With a solid emergency fund and no need to access quick cash, investors will benefit more from a traditional CD. Laddering is a popular approach for investing in CDs that promise consistent income and regular intervals. Other approaches include money market accounts which can pay as much as a CD.

Example of Liquid Certificate of Deposit

Bank ABC offers liquid certificates of deposit with interest rates ranging from 2% to 5% over time periods that range from one year (for 2% returns) to five years (for 5% returns). The minimum investment amount on these certificates differs based on investment amounts.

For example, liquid certificates of deposit with 2% interest rates require a minimum investment amount of $10,000 while those that offer 5% returns require a minimum investment amount of $25,000. Penalty-free withdrawals for CDs that offer 2% is restricted to one time while restrictions for those with 5% returns are limited to three times during the entire term period.