Are you interested in a certificate of deposit (CD) but worried about early withdrawal penalties? Life can be unpredictable, and the thought of paying a penalty to access your savings could hold you back from investing in one.
A no-penalty CD might be the solution you’re looking for — but don’t be swayed by the name alone. While there’s no fee for early withdrawals, the trade-off is typically a lower interest rate compared to traditional CDs.
Understanding how no-penalty CDs work can help you decide if they’re right for you.
What is a no-penalty CD?
A no-penalty CD is a special type of certificate of deposit that allows you to withdraw your money before the term ends without paying a fee. It’s more flexible than a traditional CD but still earns a set interest rate, unlike savings accounts whose rates can change at any time.
“A no-penalty CD can be a great option over a high-yield savings account if you know you won’t need to touch the money for a set period of time but want to keep it relatively safe from stock market fluctuations,” says Shinobu Hindert, certified financial planner and author of Investing Is Your Superpower.
How does a no-penalty CD work?
A no-penalty CD works much like a traditional CD, except there’s no early withdrawal penalty:
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You deposit a lump sum of money for a set term — usually fairly short terms of 6 to 15 months.
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The bank guarantees a fixed interest rate for that term.
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After an initial lock-up period, you can withdraw your full balance without penalty.
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Some banks may allow partial withdrawals, while others require you to close the account entirely if you withdraw early.
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If you don’t withdraw, your money continues earning interest until the term ends.
At maturity, you can renew the CD, withdraw your funds or move your money to a different account.
🔍 What is a typical lock-up period for a no-penalty CD?
Lock-up periods tend to be brief, with Ally Bank, CIT Bank and Marcus requiring seven days before you can withdraw your money without a penalty.
Dig deeper: How much money should you keep in a certificate of deposit?
What are interest rates like on a no-penalty CD?
No-penalty CD rates are typically slightly lower than traditional CDs with similar terms. As of September 2024, here are some examples of what you could expect to earn with a no-penalty CD:
“With the Fed cutting interest rates and signaling potential further cuts over the next 12 to 18 months, a CD offers the certainty of a fixed interest rate for the term,” says Hindert. “In contrast, the interest you earn in high-yield savings accounts can fluctuate based on the current rate environment, providing less certainty about your earnings.”
Dig deeper: The Fed rate cut: 5 ways lower rates will affect your wallet
Benefits of no-penalty CDs
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They’re more flexible with early withdrawals. Unlike traditional CDs, you can withdraw your funds without incurring a penalty — usually after the first week. This acts as a safety net if you unexpectedly need access to your money.
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They may have competitive rates. No-penalty CDs may offer higher interest rates than standard savings accounts or money market accounts.
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There’s an opportunity to switch to better rates. If interest rates rise, you can withdraw your funds and reinvest in a higher-yielding CD or account without losing interest or paying penalties.
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Fixed returns with less risk. As with traditional CDs, you’ll know exactly how much you’ll earn over the term.
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You have deposit insurance. Like other bank deposit products, no-penalty CDs are typically FDIC insured up to $250,000 per depositor, per bank.
Dig deeper: High-yield savings account vs. CDs: What to know when rates are high
Drawbacks of no-penalty CDs
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Typically lower rates than regular CDs. The convenience of no penalties often comes at the cost of slightly lower interest rates when compared to regular CDs with similar terms.
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Limited terms. No-penalty CDs are typically offered in shorter terms — from 6 to 15 months — which may not align with your savings goals.
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May have all-or-nothing withdrawals. Some banks require you to withdraw all of your funds and close the account if you need money early.
Dig deeper: When is it worth it to break a CD? An expert’s take on early withdrawals and breaking even
How to compare no-penalty CDs
Pay attention to these key factors as you shop for a no-penalty CD:
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Annual percentage yield. Compare APYs across multiple banks and online institutions. Don’t forget to benchmark against regular CDs to see what earns the best interest.
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Term lengths. No-penalty CDs typically offer shorter terms, from about six months to a little more than a year. While this may not matter much for early withdrawals, it does influence the total amount of interest you’ll earn.
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Withdrawal rules. Understand the specifics of when and how you can withdraw your money without penalty. Most banks allow withdrawals after the first week, but some may have longer waiting periods. Also, check if partial withdrawals are allowed or if you’re required to withdraw the entire balance.
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Minimum deposit requirements. No-penalty CDs often have higher minimum deposit requirements than regular savings accounts. Make sure you can comfortably meet this threshold without compromising your other financial needs.
💡 Expert tip — No-penalty CDs can be great for mid-term goals. However, they shouldn’t replace an easily accessible emergency fund or long-term investment plans.
Dig deeper: I’m a personal finance expert: Here’s why you need to invest in a CD today
Alternatives to no-penalty CDs
If a no-penalty CD doesn’t quite fit your financial needs, consider these alternatives.
Traditional CDs
Best for short-term savings you won’t need until a specific date
Key features
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✅ Higher interest rates than no-penalty CDs
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✅ Locked-in rate for the term
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❌ Early withdrawal penalties apply
High-yield savings accounts
Best for emergency funds or savings you need to access frequently
Key features
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✅ Competitive rates, often close to no-penalty CDs
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✅ Easy online access
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❌ May be limited to six withdrawals per month
Money market accounts
Best for savings you want to keep accessible for occasional expenses
Key features
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✅ Higher interest rates than traditional savings accounts
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✅ Check-writing privileges and debit card access
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❌ Minimum balance requirements may apply
Short-term bond funds
Best for those willing to take on slightly more risk than a CD
Key features
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✅ Potentially higher returns than CDs
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✅ More liquidity than traditional CDs
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❌ Subject to market fluctuations
Laddered CDs
Best for CD investors who want to lock in the highest yields while still maintaining liquidity
Key features
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✅ Higher rates than no-penalty CDs
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✅ Regular access to portions of your money as each CD matures
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❌ Requires managing multiple CDs
Brokered CDs
Best for people who would rather buy a CD through their brokerage account
Key features
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✅ Often higher rates than bank-offered CDs
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✅ Can be bought and sold on secondary market
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❌ May have higher minimum deposit requirements
Jumbo CDs
Best for CD investors with larger deposits
Key features
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✅ Typically higher rates for large deposits of $100,000+
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✅ FDIC insured up to $250,000
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❌ Requires significant upfront investment
Riskier investments
Best for long-term investors comfortable with market volatility
Key features
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✅ Potential for higher long-term returns
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✅ Opportunity for portfolio growth
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❌ Higher risk of loss, especially in short term
Who is a no-penalty CD best for?
No-penalty CDs may appeal to several types of people:
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Savers who want higher interest than a savings account without losing access to their money.
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Those saving for short-term goals with uncertain timelines — like a new car, a down payment on a house, home renovations or college costs.
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Retirees looking to earn more interest on their cash reserves.
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Retirees needing a safe spot for unused required minimum distributions while they figure out what to do with them.
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Savers looking to boost interest on part of a large emergency fund.
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First-time CD investors wanting to try them without long-term commitments.
But remember: A no-penalty CD should only be one part of your overall financial plan. “As people near retirement, it’s common to think all investments need to become ultra-safe,” says Hindert.
“While that’s true for a portion of your assets, it’s not true for all of your money. People retiring today could live well into their 90s, so it’s important to have part of your portfolio focused on growth to keep up with inflation and rising healthcare costs. A no-penalty CD can be a solid piece of an overall strategy, but it shouldn’t be the only strategy.”
Dig deeper: 7 best low-risk investments for retirees: Steady returns to protect your nest egg
FAQs: Certificates of deposit and your savings
Still have questions about no-penalty CDs? Explore these frequently asked questions.
Can I add money to a no-penalty CD?
Generally, no. You can’t add more money to a no-penalty CD after you open it. You’re usually allowed one deposit when you open the account, and that remains your balance until it matures or you withdraw the funds.
What is the difference between an Ally high yield CD and a no-penalty CD?
Ally Bank’s high yield CD is a traditional CD with higher rates but also early withdrawal penalties. Its no-penalty CD comes with lower rates but allows withdrawals without fees after the first six days. Also, the high-yield CD offers more term options compared to the no-penalty CD.
About our writer
Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes Advisor, MarketWatch, CNN Underscored, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she’s committed to empowering people to stand up and take charge of their financial futures.
Article edited by Kelly Suzan Waggoner
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