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No-penalty CD vs. savings account: What’s the better choice for your financial needs

November 27, 2022, 1:00 PM UTC
Young woman doing home finances in the evening
A no-penalty CD offers some flexibility. But it's not always the best option.
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This article was originally published on Bankrate.com.

A no-penalty certificate of deposit (CD) and a savings account both provide a safe place to earn some interest on your money and allow for easy access to the funds. Both of these accounts can come in handy if you need to withdraw cash in a financial emergency. You might be able to find a higher rate with a no-penalty CD than with a savings account, although these CDs often come with certain restrictions regarding withdrawing and depositing funds.

Here’s what to know about no-penalty CDs and savings accounts to help you decide which is better for you.

What is a no-penalty CD?

No-penalty CDs are commonly offered by banks and credit unions, and their terms typically range from several months to more than a year. Unlike the money in a standard CD, the funds in a no-penalty CD can be withdrawn before the term is up without the bank charging a penalty.

Banks may allow penalty-free access to the money in a no-penalty CD starting around a week after you’ve opened and funded the account.

Not all banks that offer CDs include the no-penalty variety in their lineups. Some banks that do currently offer no-penalty CDs include Ally Bank, Citibank and Marcus by Goldman Sachs. Some banks require a set minimum deposit when you open a CD, while others don’t impose any such requirement.

Pros of a no-penalty CD

  • Liquidity: You can withdraw the funds from a no-penalty CD before the term ends without being penalized. This can prove useful if you’re hit with a sudden expense such as a medical bill or a major car repair.
  • Guaranteed APY: Unlike a variable-rate savings account, a no-penalty CD earns a fixed annual percentage yield (APY), which can be a benefit for savers who wish to know exactly how much interest the account will have earned when the term ends.
  • Safety: The money in a no-penalty CD kept at a federally insured bank or credit union will be protected up to $250,000 per account owner.

Cons of a no-penalty CD

  • Withdrawal restrictions: Partial withdrawals from a no-penalty CD may not be allowed. If you need to withdraw some money from the account, you’ll need to take out all of the funds and close the account.
  • No adding of funds: You typically cannot deposit additional money into a no-penalty CD once you’ve opened and funded the account.
  • Lower rates than traditional CDs: In exchange for liquidity, no-penalty CDs often pay lower rates than their traditional counterparts.

When to choose a no-penalty CD

A no-penalty CD may be a better option than a traditional CD if you believe there’s a chance you’ll need access to the funds before the term is up.

It can also be a good choice if you find one that pays a higher APY than various banks are offering for their savings accounts. What’s more, a no-penalty CD can be beneficial for savers who prefer a guaranteed rate of return.

What is a savings account?

A savings account is a deposit account offered by banks and credit unions. Your money in such an account will earn a modest amount of interest, and many savings accounts have low or no minimum deposit requirements.

These accounts are a good place to store your emergency fund, as well as money that may be needed in the relatively near future for things like a family vacation or a planned home repair.

Savings accounts earn variable rates, meaning the rates can be changed by the bank at any time. You can move money in and out of your savings account easily, but Regulation D limits the number of withdrawals or transfers out of the account to six per month.

Pros of a savings account

  • Liquidity: It’s easy to move money in and out of a savings account, making it a good place for an emergency fund or short-term savings goals.
  • Interest-bearing: The money in savings accounts earns a yield, so your funds will grow over time.
  • Safety: As long as a savings account is with a federally insured financial institution, the funds are protected up to $250,000 per account owner.

Cons of a savings account

  • Limits on withdrawals: While savings accounts are a good place for money you may need in an emergency, Regulation D limits the number of withdrawals or transfers out of the account to six per month.
  • Higher yields can be found elsewhere: Savings accounts are a safe place to earn a modest interest rate, yet significantly higher yields can be earned from other financial products, including some CDs.

When to choose a savings account

A savings account may be a better option than a CD if you plan to make multiple withdrawals or deposits over time. What’s more, a savings account’s APY may increase during a rising-rate environment, whereas fixed-rate CDs won’t see such a rate bump.

It can pay to shop around for a savings account that earns a high rate. For instance, savings accounts at online banks typically earn rates that are many times greater than the national average.

Comparing no-penalty CDs and savings accounts

There are various similarities and differences between no-penalty CDs and savings accounts.

The funds in both no-penalty CDs and savings accounts are insured up to $250,000 per depositor, per insured bank, per ownership category when the accounts are with a bank that’s a member of the Federal Deposit Insurance Corp. (FDIC). Similarly, money deposited into these types of accounts at a credit union are protected when the institution is insured by the National Credit Union Administration (NCUA).

Bottom line

No-penalty CDs and savings accounts may both earn competitive rates of return. Each also allows for easy access to your funds without penalty, making them a suitable place to keep your emergency fund.

Whether your money is better off in a savings account or a no-penalty CD depends on your own personal financial situation. While you may find a no-penalty CD that earns a high rate of return, it’s important to know its restrictions regarding withdrawing and depositing funds before choosing it over a savings account.

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