What are “No Penalty” CDs?

Have you ever wished you could lock in a competitive, guaranteed rate on your savings while still retainign the flexibility to access your cash in a pinch? If so, then you might be interested in a so-called “No Penalty” certificate of deposit (CD).

What is a “No Penalty” CD?

“No Penalty” CDs are exactly what they sound like — CDs that have no penalty for early withdrawal. In the case of traditional CDs, you typically forfeit a portion of the interest that you’ve earned (often 3-6 months worth, but sometimes more) if you break your CD prior to maturity.

Given the above, “No Penalty” CDs can be a great option in a falling interest rate environment because you can lock in a decent rate but still have access to your cash. Alternatively, in a rising interest rate environment, they give you the freedom to switch to a higher rate.

What’s the downside?

As great as “No Penalty” CDs sound, there are some downsides and limitations. For starters, the rates on “No Penalty” CDs are somewhat lower than traditional CD rates. In some cases, they might be no higher than online savings account rates.

In terms of minimums, some banks require high minimum deposits for their “No Penalty” CDs, in some cases ranging as high as $5k-$25k. Fortunately, others don’t. Thus, it’s important to look closely at the terms when considering your options.

In addition, despite their “No Penalty” moniker, there might still be some limitations on how/when you can access your money. For example, while some banks allow you to pull your money back out within a week or less, others require up to 30-90 days.

Finally, “No Penalty” CDs are typically short-term CDs. In the vast majority of cases, we’re talking 9-12 months, or even less. This means that the rates won’t be all that high, as shorter-term CDs have lower rates.

Where can you get “No Penalty” CDs?

“No Penalty” CDs are offered by a variety of banking institutions. As noted above, rates and terms vary, so it pays to shop around. One bank with particularly good terms is Ally Bank, who offers “No Penalty” CDs with no minimum deposit requirement, a relatively narrow spread between their traditional and no-penalty CD rates, and you can access your money within six days of opening the CD.

Alternatives to “No Penalty” CDs

While “No Penalty” CDs can be a great deal for some, they’re not necessarily for everyone. For example, if you don’t have a lot of money, it might not be worth going to the trouble of opening CDs vs. simply using a high-yield online savings account, especially given the relatively flat interest rate landscape right now.

In our case, we’ve opted to stick with the tried-and-true CD ladder approach. We’ve built a five year CD ladder with one CD corresponding to 20% of our holdings maturing each year. This gives us a bit of flexibility while smoothing out the inevitable ups and down of interest rates. Our longer time horizon has also allowed us to lock in higher rates than would otherwise be available.

If you’re a bit more risk tolerant, another possibility would be to invest with Lending Club, which offers three year notes paying an average of 9.5% annually (my review). Because Lending Club has a note-trading platform, you can actually sell your notes to other investors mid-stream, providing a bit of liquidity.

7 Responses to “What are “No Penalty” CDs?”

  1. To those wondering about why CD rates at some banks are lower than checking.savings, I think this is a sign that the banks intend to drop their rates further in the not so distant future.

  2. Anonymous

    I didn’t know that how I was buying CDs had a name — CD ladder, but it’s good to know that my thinking isn’t re-creating the wheel. I must be on the right track.

    P.S. I too think it’s weird that ING savings and orange electric carry a higher interest rate than its CDs.

  3. Anonymous

    We are holding a large amount of cash for a down payment on a house. We can’t take much risk with this money and we will need it potentially within a few weeks when we find our new place. So we have a bunch of no-penalty CDs with Ally, each holding a few thousand. When we need the money, we simply break all the CDs. Perfect for our situation, of course not for everyone.

  4. Anonymous

    Are we talking about “option CDs” here? It’s just the same. The “cost” is simply a lower interest rate return for the option of being able to withdraw your money without penalty. The penalty usually is 3-6 months worth of interest.

    I used a 1 year option CD earlier this year. I put about $200,000 into it at 2.5%. 3 months later, the stock market was considerably lower, so I took about $50,000 and invested it in the stock market, but I was also nervous, so I took the other $150,000 and locked it up in a 5 yr CD at 4.5%. Ideally, I should have dumped everything in the stock market, but one never knows.

    It’s good to have the option of no penalty though!



  5. GM: Unfortunately, no.

    Here’s the scoop:

    “The Notes are presently being offered and sold solely to residents of the states of California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming, and are not presently being offered or sold to residents of any other state, the District of Columbia, any other territory or possession of the United States, or any foreign country.”

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