No Penalty CD Vs. Savings Account (2024)

Choosing the right place to park your money can make all the difference in your financial growth. No-penalty certificates of deposit (CDs) and savings accounts are two popular, low-risk options. But which one is right for your savings goals and timeline?

What Is a No-Penalty CD?

A no-penalty CD, often referred to as a “liquid” or “breakable” CD, is a type of certificate of deposit that lets you withdraw funds before the end of your term without paying a penalty.

Like regular CDs, no-penalty CDs earn interest over a fixed period—called the term—which can range from months to years. However, unlike traditional CDs that charge you an early withdrawal penalty if you take money out before the CD matures, no-penalty CDs allow you to do so without incurring any fees.

Depending on the bank, you may be able to withdraw money from your no-penalty CD as early as a week after you’ve deposited money into it. However, you must withdraw the entire balance, not just a portion.

Pros of No-Penalty CDs

• Flexibility. As their name suggests, no-penalty CDs allow you to withdraw your total balance early without incurring hefty penalties. So, if you want the security and benefit of fixed-rate returns but are unsure about committing your funds for a long period, no-penalty CDs could be worth considering.
• High APY. No-penalty CDs typically offer higher interest rates than traditional savings accounts. Some of the best no-penalty CD rates range from around 3.00% to 5.00% APY. On the other hand, the national average interest rate on traditional savings accounts is only 0.46%, according to the FDIC.
• Security. Like savings accounts and other types of CDs, no-penalty CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per FDIC-insured bank and per ownership category, making them a relatively safe investment.

Cons of No-Penalty CDs

• Lower rates than traditional CDs. While no-penalty CDs typically offer interest rates similar to high-yield savings accounts, they usually have lower rates than standard CDs. That’s the price of greater flexibility.
• Shorter terms. No-penalty CDs typically come in shorter term lengths like 11 or 12 months. So while you’re able to lock in a high rate with no risk, you can usually only secure that rate for a year at most.
• Initial deposit requirement. Many no-penalty CDs require an initial deposit as high as $1,000. Some are even higher, which can be a financial barrier for some investors.
• Deposit limits. Like traditional CDs, no-penalty CDs typically won’t allow you to make additional deposits after the initial one.

What Is a Savings Account?

A savings account is an interest-bearing deposit account at a bank, credit union or other financial institution that allows you to safely store your cash.

Unlike checking accounts, savings accounts are generally for cash you don’t plan to use for daily expenses. To encourage you to leave your money in the account to grow, some financial institutions only let you make up to six withdrawals per month before they charge a fee. So, before opening a savings account, review the disclosure or contact the bank to see what limits and fees may apply.

While some consumers may prefer to open traditional savings accounts with the same bank where they already have a checking account, others may opt for high-yield savings accounts offered by online banks.

It’s important to note that unlike CDs, which offer fixed interest, savings accounts earn variable interest. This means your APY can change at any time. If interest rates go down in the future, your savings account rate will likely decrease as well.

Pros of Savings Accounts

• Interest. By opening an interest-earning savings account, you can prevent inflation from eating away at your funds or at least reduce inflation’s damage. With a high-yield savings account, you can earn APYs as high as 5% or more.
• Easily accessible. Unlike no-penalty CDs that require you to withdraw your full balance at a time, you can withdraw money from your savings balance whenever you need to, keeping in mind that some accounts have a monthly withdrawal limit.
• Insurance. Most savings accounts are insured by the FDIC for up to $250,000 per depositor, per FDIC-insured bank and per ownership category. Likewise, if you open an account at a credit union instead of a bank, up to $250,000 of your deposit is covered by NCUA insurance.

Cons of Savings Accounts

• Low interest rates. Compared to other investment options, the interest rates offered by savings accounts are usually quite low—unless you opt for a high-yield savings account.
• May require a minimum balance. Some savings accounts have minimum balance requirements to earn interest or have a monthly fee waived. If your balance falls below that amount, you may be charged a monthly fee or lose out on interest.
• Withdrawal limits. While Federal Reserve Regulation D—which restricted convenient withdrawals or transfers from savings accounts to six per month—is no longer in effect, many banks are still enforcing the rule.

No-Penalty CD vs. Savings Account

While no-penalty CDs offer many benefits, they aren’t always the right fit for everyone. The same goes for savings accounts. Here’s a quick breakdown of how no-penalty CDs and savings accounts compare.

Whether you park your cash in a no-penalty CD or a savings account, remember the features of these accounts can vary from one bank or credit union to another, so always review the specific terms and conditions before opening one. Check out our top picks for the best high-yield savings accounts and best no-penalty CDs if you need help narrowing down your options.