No-Penalty CDs: A Better Way to Save?


The uncertain interest rate climate has many wary of long-term CDs, as nobody wants to tie up their money for an extended period of time and then watch helplessly as rates suddenly climb upwards.

One option is a no-penalty CD, which typically allows you to withdraw some or all of the money in the CD before its maturity date. Unlike most CDs, doing so does not cause you to incur any kind of penalty. Getting this sort of liquidity comes at a price, of course, and you’ll typically see lower interest rates than you would on a CD that penalizes for withdrawals. Still, these no-penalty CDs tend to have higher rates than a standard savings account, despite the fact that the ability to withdraw funds make them similar to a savings account.

Ally Bank, for instance, offers an 11-month no-penalty CD at a 1.28% APY. That’s only slightly lower than the 1.32% APY offered on its high-yield 12-month CD, which will penalize you to the tune of 60 days worth of interest for withdrawing money before maturity. And it’s more than 20 basis points higher than the bank’s savings account, which stands at a 1.11% APY. Yes, you can make more transactions with the savings account, so that might be a better option if you anticipate depositing and withdrawing money on a regular basis. But if you’re committed to saving your money for a set period of time and simply want to hedge against interest rate risk, a no-penalty CD might be your best bet.

So why are banks willing to offer these products at rates that are comparable to their standard-CD counterparts? After all, allowing account holders to withdraw funds as they please negates the bank’s primary incentive to offer CDs – the ability to hold onto a customer’s cash for a predictable period of time.

Some banks simply have an urgent need for cash, says Michael Moebs, CEO of the economics consulting firm Moebs $ervices. “There’s been a lot of money moving out of CDs, so there’s a lot of concern,” he says. While the penalty-free withdrawal option removes the guarantee that the customer will keep the money in the bank for the CD’s duration, banks can count on many customers foregoing that option.

Consumers should also read all the fine print. All no-penalty CDs will stipulate that money can’t be removed for the first seven days, but some may impose a longer waiting period or other conditions. Our sister site RateWatch identified several no-penalty CDs being offered as specials by various banks, but not all of them offer completely unfettered access. Northpointe Bank of Michigan, for instance, offers a 36-month “Compass CD” with a 1.8% APY that lets you withdraw your money – but only after the first 18 months. If rates rise precipitously during the first year or so of the CD, you’ll find yourself pining for the interest you could be earning.

Finally, if a product seems too good to be true, consider whether it’s an act of desperation by an at-risk bank. “You have to realize that with no-penalty or bump-up CDs, the bank is taking on greater risk,” Moebs says. “Why are they doing this? Look at their capital and make sure they can actually make it through without problems.”

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