I can still remember earning double-digit returns on high-interest CDs in the early 1980s. I had saved a little money and was locking it away in 6-month CDs earning 12% or more. Of course, inflation was raging, and the interest rates on home mortgages had gone through the roof. But those were the days for savers. And it was also a much simpler time for those wanting to save with a CD.
All you did was pick the term you wanted and deposit your money. Today we have all kinds of exotic types of CDs, including liquid CDs, risk-free CDs, and access CDs. And while they go by different names, they all describe the same type of certificate of deposit--the no-penalty CD.
As the name suggests, a no-penalty CD typically does not charge a fee if you withdraw your money before the CD term expires. Traditional CDs levy a penalty when an account holder withdraws the money before the CD matures.
The amount of the penalty varies based on the length of the CD, with longer CD terms resulting in high penalties for early withdrawal. The amount of the penalty is usually the loss of so many months worth of interest. Recognizing that many savers don’t like the penalty aspect of certificates of deposit, some banks have launched penalty-free CDs.
Best No Penalty CD Rates
Unfortunately, the number of banks that are currently offering a no-penalty CD is just two. That said, the rates and length of term are very good when compared to online savings accounts and 1-year high yield CD rates. Because rates can change without notice, be sure to confirm the rates and terms on the bank’s website before opening an account.
CIT Bank 11-Month No Penalty CD--If tiered interest rates aren’t your thing, then CIT Bank and their 11-month no-penalty CD is right up your alley. All deposits, no matter the size will receive a 4.10% APY. The primary difference between CIT and Ally is the minimum deposit. Ally has no minimum deposit required, CIT requires a $1,000 initial deposit.
With CIT, the no-penalty CD kicks into full effect seven days after your deposit is made. CIT also offers a few other kinds of CDs including a Jumbo CD and a RampUp™ CDs. This allows you to increase your CD rate once per term.
Ally Bank 11-Month No Penalty CD--The Ally Bank no-penalty CD is a little different than most CDs. It’s tiered with three different interest rates depending on the amount of money you can deposit.
- .50% APY for deposits of $25,000 or more
- .50% APY for deposits of $5,000 - $24,999
- .50% APY for deposits of less than $5,000
After six days, the entire balance of the CD can be withdrawn penalty-free. The CD can automatically renew if you choose. The rate for your renewed no penalty CD can be different. Whatever the rates are at the time of renewal are the rates you will receive. Future no penalty CDs will not be locked in at the current APY.
Related: Ally Invest - Online Discount Broker
Beware of No Penalty CD Impostors
Some banks advertise CDs as no penalty, when that’s not exactly accurate. For example, Discover Bank offered a CD with what it described as a penalty-free CD. So what are these benefits? Basically, if you invest in a 12-month CD, and during the CD’s term lose your job, you can withdraw the balance without penalty. Here are the details:
“The Discover Bank “No Penalty CD” benefit applies to 12-month Certificates of Deposit and/or 12-month IRA Certificates of Deposit* (“CD”) opened or renewed between July 1, 2009 and December 31, 2009 and held as a sole ownership or joint-tenant account. The No Penalty CD Benefit (“Benefit”) waives the Early CD Withdrawal Penalty fee in the event an account holder experiences involuntary** job loss.
In order to qualify for the Benefit the following conditions apply: Account holders employed by a business or organization must: (1) be employed full time*** when the CD was opened or renewed, and for 30 days thereafter (2) involuntarily lose his/her full-time job and (3) provide proof of unemployment to Discover Bank.
Account holders who are self-employed when CD was opened or renewed must have suffered one of the following events after account opening or renewal: (1) business property or inventory damage; or (2) business closure for at least 5 business days due to fire or flood. Proof of such event will be required at time of request. The Benefit does not apply within the first 30 days of account opening or renewal.
The account holder must complete, sign, notarize and return proof of unemployment and/or other documents requested by Discover Bank to Discover Bank via facsimile and certified mail, return receipt requested. If account holder is deemed ineligible for the Benefit, Discover Bank will contact the account holder to confirm the withdrawal request. To apply for Benefit or for any questions about the Benefit, account holder must contact Discover Bank toll free at 1-800-347-7000 or write to Discover Bank, PO Box 2019, Greenwood, DE 19950."
This penalty-free benefit is a nice feature. But it is not a true no-penalty CD, at least it’s not what most people think of as a risk-free CD.
Don't Confuse a No Penalty Certificate of Deposit with a Savings or Money Market Account
Don’t confuse a CD with a savings or money market account. Once you invest in a CD, you can’t add to it. You can of course open another CD. And when any CD reaches maturity, you can rollover the CD, adding funds to the account at that time. But CDs are not demand deposit accounts. As a result, if you exercise your right to withdraw money early without penalty, you must take all of your money and earned interest. In other words, you close the account.
Why Do Risk-Free CDs Have a Term?
One common question is why risk-free CDs have a term. After all, if you can withdraw the money anytime you want, who cares about the term of the CD? It’s because CDs are generally fixed-rate deposit instruments. That’s why longer-term CDs generally pay higher rates. And so the point of the term is that’s how long the bank is willing to fix the rate. Once the term expires, the then prevailing rate will apply if you roll over the funds into a new CD.
Are No Penalty CDs a Good Place to Keep Your Emergency Fund?
In this podcast episode, we discuss why a no-penalty certificate of deposit is a great option for your emergency fund: