Perhaps the biggest drawback to a certificate of deposit is that you have to lock your money away for the term of the CD. While you can withdraw your deposit early, with most CDs you get hit with a penalty equal to several months’ worth of interest.
One alternative to having a less than fluid CD situation is creating a CD ladder. By laddering, you’ll be able to separate your CD into multiple CDs. So you’ll always have the ability to take cash out without losing interest in a penalty.
What happens if you don’t have enough funds to create a CD ladder? Well, a few banks have recognized this drawback. So they are encouraging new customers to open a CD by offering what they call a no-penalty CD.
The Ally Bank no-penalty CD has an 11-month term. That’s a touch shorter than a standard 12-month high yield CD. And the no-penalty CD carries with it an interest rate slightly shorter as well. So why would anyone own this CD and not the higher interest version?
Ally Bank 11 Month No-Penalty CD
The Ally Bank 11 month no penalty CD offers everything a traditional CD offers with one big hook. Ally currently breaks down the interest rate you're set to receive into three tier levels:
- Deposit less than $5,000, and receive an interest rate of 1.65% APY
- Deposit between $5,000 and $25,000, and receive an interest rate of 1.80% APY
- Deposit more than $25,000, and receive an interest rate of 2.00% APY
There is no minimum to the amount of money you need to deposit to open an Ally no-penalty CD. That said, they currently offer a 1.80% APY on their online savings account. At current interest rates, there is no benefit to owning a no-penalty CD if you’re investing less than $25,000.
What sets apart the Ally Bank no penalty CD from the competition is that after you’ve deposited funds and held them for six days, you can withdraw the full balance of your CD at any time, without penalty. Most banks charge a penalty for early withdrawal. This CD allows you to close it any time after the first six days for any reason, penalty-free.
How Much Money Can a No Penalty CD Save You?
Let’s assume you have $50,000 to invest in a short-term, risk-free venture. For one year, you’re looking to tuck your money away into a deposit account. Exploring the options Ally has to offer, what would your interest rate be if you didn’t touch your money? Or if you had to take your money out early?
Ally offers a high yield 12 month CD, a no penalty 11 month CD and a savings account. This is how much interest you'd end up earning after one full year.
- High Yield Savings Account (1.80% APY) - $907.46
- 11 Month No Penalty CD (2.00% APY) - $1,009.22
- 12 Month High Yield CD (2.15% APY) - $1,085.66
Winner--High Yield CD.
After nine months, you're in need of a very expensive roof repair and need to close the CD early. Here's your interest calculation for taking money out early.
- High Yield Savings Account (1.80% APY) - $679.06
- 11 Month No Penalty CD (2.00% APY) - $755.02
- 12 Month High Yield CD (2.15% APY) - $359.30
Winner--No Penalty CD. The Savings account has no penalty. But the 12-month high yield CD docks you 150 days’ simple interest. In essence, you’ll only earn four months’ worth of interest for having the CD for nine months.
Ally No-Penalty CD Bottom Line
There’s no question in my mind that the Ally Bank offer is the best no penalty option available today. It beats the rates offered by just about any other bank’s regular CD with a comparable term. But the real question is whether you chose Ally Bank’s 12-month CD, which does charge early withdrawal fees, over the 11-month CD that doesn’t charge a penalty. Depending on how much you have to invest, you could earn 15 more points of interest on the 12-month CD. Just make sure you don’t withdraw the funds early.