No-Penalty Certificate of Deposit (CD)

What Is a No-Penalty Certificate of Deposit (CD)?

A no-penalty certificate of deposit (also known as a liquid CD) is a type of CD that allows you to withdraw funds without paying a penalty. The account's funds are accessible at all times—unlike most traditional CDs. Traditional CDs typically charge a hefty penalty fee for withdrawing money early. However, liquid CDs generally offer lower rates and shorter terms than traditional CDs, so you may trade lower earnings for flexibility.

Key Takeaways

  • A no-penalty certificate of deposit is a CD that allows investors to make withdrawals without incurring a penalty.
  • No-penalty CDs may also be called Liquid CDs by banks and credit unions.
  • No-penalty CDs can offer lower interest rates than traditional CDs, but competitive rates do exist if you look for them.
  • Alternatives to no-penalty CDs include money market accounts and bank savings accounts.

Understanding a No-Penalty CD

No-penalty CDs may also be called liquid CDs or penalty-free CDs. These CDs allow you to make a withdrawal before the CD's maturity date. Penalty-free CDs tend to have fairly short terms, typically 13 months or less.

To withdraw your money, you must give the institution advance notice. It’s usually not as simple as withdrawing from a checking account, although some financial institutions may allow multiple withdrawals up to a specified limit.

There is often an initial lock-up period where you can't take money out, despite the name. You can’t withdraw in the first week or so to comply with federal regulations.

Penalty-free CDs frequently require removing all account funds immediately if you decide to "break open" your CD. However, some may allow you to take out a portion of the total amount, as with a savings account.

Breaking your financial institution's rules can result in withdrawal penalties comparable to a traditional CD. If you're interested in a liquid CD, read all the terms and conditions of the product, which should state the minimum account size, term length, and any withdrawal requirements.

No-penalty CDs, like other types of CDs, run the risk of inflation eating into your interest earnings.

Alternatives to a No-Penalty CD

Some investors enjoy a liquid CD's flexibility. It provides quick and easy access to interest-bearing funds in an emergency, so a huge cushion of idle cash doesn't sit in a savings account. If you think CD rates might rise, your no-penalty CD allows you to access your funds to reinvest in a new, traditional CD without losing any of your earnings.

No-penalty CDs aren’t for everyone, though. Other solutions can satisfy various financial goals. For example, a traditional CD offers better returns and more term choices but less flexibility. If you have a solid emergency fund and no need to access quick cash, you could benefit from a traditional CD.

Laddering is a popular approach for investing in CDs that promises consistent income at regular intervals. Another approach is to open a money market account, which provides more flexibility than a CD. Even the best high-yield savings accounts offer rates that are nearly as high as the best CD rates.

If you're in a rising-rate environment, a high-yield savings account or money market may be a better bet than any CD; if interest rates are predicted to fall, you're better off locking your money into a standard CD.

Examples of a No-Penalty CD

A bank offers two types of CDs. Joe wants a traditional CD for his $1,000 and has many term options to choose from, both short-term (3, 6, or 9 months), medium-term (12, 18, or 24 months) and long-term (3-7 years). The bank offers a promotional 4% interest rate if he chooses an 11-month CD term.

At the end of the term, Joe will earn $37.28 in interest, for a total of $1,037.28 (assuming interest is compounded monthly).

Annika wants a more flexible CD. The same bank only offers one type of no-penalty CD with an 11-month term and 3.5% interest rate. At the end of the 11-month term, Annika will earn $32.56, for a total of $1,032.56. At that point, she can renew the CD or put it into another CD type.

Imagine that either Joe or Annika wants to take money out of their CD early, after 4 months. Annika will not pay the penalty so she will keep roughly $11.72 in interest earnings.

Joe will pay a penalty of 3 months of interest, or $10.03. He will only earn $3.33 in interest.

Also, consider if interest rates are rising rapidly, and in a few months, the bank is offering a new promotional 12-month CD at 4.5%. Annika can take her money out and put it into the new traditional CD without losing any of her interest. Joe can't do so without paying the penalty.

Is a no-penalty certificate of deposit worth it?

No-penalty certificates of deposit or penalty-free CDs offer certain benefits but aren’t an ideal option for everyone. No-penalty CDs offer FDIC-insured security and flexible withdrawals. But they often provide a lower rate of return and are only offered for shorter terms. However, if you hunt around, you may find a penalty-free CD with a competitive APY.

Are there limits to how much I can take out of a liquid CD?

Depending on your bank, there may be limits on how much you can withdraw from a liquid CD and how quickly you can access your money. Although rules differ by bank, many no-penalty CD accounts require investors to give notice and limit their withdrawals to a certain amount, or require you to remove all of your funds and close the account. While it is possible to access your money, it won’t be as easy as liquidating a regular bank account.

Is a no-penalty CD a good place for my savings?

A no-penalty, or liquid, CD could be a good place to park your savings as long as you don't think you'll need the money immediately—for example, if you'll likely only need the money in a few months for a vacation. Despite the "liquid" term for this type of CD, you can't actually take your money out immediately for use. You may need to wait several days or a week to retrieve it after closing the account. So if you think you might need same-day or emergency access, a traditional savings account fund might be a better option.

The Bottom Line

A no-penalty CD can help you gain confidence in investing in CDs, particularly if you're new to saving with CDs. You can withdraw your funds before the term is over without paying an early-withdrawal penalty. On the other hand, your no-penalty CD may come with restrictions and rules that vary by bank, and you won't have immediate access to funds as with a savings account. You usually have to wait a few days or a week to withdraw without penalty. In addition, the interest rate may be lower than you'd find with a traditional CD unless you invest time in research.

Article Sources
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  2. "What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)?"

  3. "High-Yield CDs."

  4. First Bank & Trust. “CD Ladder Calculator.”

  5. FDIC. "Deposit Insurance FAQ."