No-Penalty CDs: Should You Be Buyer?

Last Update: September 8, 2021 • Banking •

In life, emergencies can strike at any moment: maybe you lost your job, or maybe a flood has your basement underwater. When situations like these occur, it’s nice to have a savings balance between cushioning the blow.

But, if you invest your money in certificates of deposit (CDs), issuers will charge you a penalty fee to access your funds before maturity. Then the result? A bad situation becomes even worse.

But don’t worry, there are options. No-penalty CDs allow you to withdraw your money and not incur any fees. More importantly, no-penalty APYs are comparable to standard CD APYs, making them a no-brainer for your investment.

What are The Best No-Penalty CDs?

When scouring the marketplace, it’s clear that online banks offer the best bang for your buck. They’re easy to use, offer great rates, and our recommendations only require a small initial investment.

Marcus: By Goldman Sachs

Needing only a $500 investment to qualify, Marcus: By Goldman Sachs offers three types of no-penalty CDs:

7-Month No-Penalty CDs have an APY of 2.25%.
11-Month No-Penalty CDs have an APY of 2.30%.
13-Month No-Penalty CDs have an APY of 2.35%.

From an interest-rate perspective, there’s a lot to like. And while the 7-month APY of 2.25% is the same as its online savings account, the 11-month and 13-month CDs offer a 0.05% and 0.10% increase. All of them won’t increase the risk.

Marcus requires you to wait seven days after your initial deposit to withdraw any money regarding its withdrawal policy. After the seven days are over, you’re free to withdraw funds at any time. Keep in mind that you have to withdraw the full amount because Marcus does not allow partial withdrawals.

A great feature of a Marcus no-penalty CD is your money is always protected. Balances up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC), so you can rest easy knowing your money is always safe.

Ally Bank

If you can’t meet the $500 minimum above, Ally bank is the option for you. And while the online bank only offers one term-length – an 11-month CD – its APYs vary depending on how much you deposit.

All balance below $5,000 earns a 1.80% APY.
Balances between $5,000 and $24,999 earn a 2.15% APY.
Balances $25,000 or more earn a 2.30% APY.

When you compare Ally’s rates to Marcus’ above, you can see that increasing your investment doesn’t really help. With higher rates and the ability to withdraw funds at any time, we recommend you stick with Marcus if your balance is $500 or more.

However, if you’re new to saving or plan to make small deposits from your paycheck every two weeks, Ally Bank is a great option. 1.80% is an extremely competitive interest rate when it comes to no-penalty CDs. But, before locking in your rate, you should first consider an online savings account. We have a great list of options here. Accounts with APYs of over 2.20% require a minimum balance greater than $1. And because you can make deposits and withdrawals at any time, in many cases, they’re a better option than no-penalty CDs.

What are The Pros and Cons of No-Penalty CDs?

Whether it’s a credit card, personal loan, or in this case, an investment decision – we always recommend you weigh the pros and cons before accepting the offer. When it comes to no-penalty CDs, the approach is no different.

Pros:

Receive a high fixed interest rate. CDs usually offer higher APYs than savings accounts but require you to lock up funds for a certain period of time. With no-penalty CDs, you can withdraw your money at any time and still receive a great rate.
Hedge against rising interest rates. If the Federal Reserve increases interest rates, savings and CD rates will rise across all institutions. Since you can withdraw your funds at any time, no-penalty CDs allow you to reinvest those proceeds and not miss out on higher rates.

Cons:

No-penalty CD rates are less than traditional CDs. To compensate the bank for providing additional flexibility, you have to accept a lower interest rate than you would with a traditional CD. Since traditional CDs can’t be withdrawn without paying a fee, it gives banks more certainty regarding paying you back. With no-penalty CDs, you can request your funds at any time, which increases their uncertainty.
You have to withdraw the full amount. If you decide to withdraw your funds, you have to take out the entire balance. Partial withdrawals are not allowed.
You can’t make recurring contributions. Unlike savings accounts where you can deposit funds daily, weekly or monthly, no-penalty CDs have fixed principal balances. And while this is the case with all CDs, it’s just one of the reasons online savings accounts can be a better option.

Conclusion

When you find yourself in a tough spot and need money fast, the last thing you want is a lock on your investment account. I mean, it’s your money. If you choose a traditional CD, you need to abide by the terms of the agreement, regardless of the circumstances. Conversely, a no-penalty CD offers the best of both worlds. You receive a competitive interest rate that allows your savings to grow, and you still have the flexibility to access your money when you need it. However, the downside of no-penalty CDs is that their APYs can be less than online savings accounts. So, before you make your next investment, take a look at both online savings accounts and no-penalty CDs before you decide which one is right for you.