Are no-penalty CDs a smart choice this spring? Experts weigh in
With interest rates still high after the Fed's recent series of rate hikes, it can be a good time to take advantage of interest-yielding accounts like high-yield savings accounts and, notably, certificates of deposit (CDs).
"CDs had been a less popular investment option in the past five to 10 years as we were in a very low-interest rate environment and most investors were targeting the higher yield of equities and other investment options," says Chris Cucci, senior vice president and chief of staff at Climate First Bank. "However, that has changed in the past 12 to 18 months as rates have risen and perceived risk in equities and other investments has increased."
The current national deposit rate on savings accounts is multiple times higher than it was in May of 2022. Similarly, the average interest rate on a 12-month CD has increased exponentially over the same period.
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Are no-penalty CDs a smart choice this spring?
With the Fed saying it may cut rates as soon as summer, CDs offer you a chance to lock in a higher rate now — a feature not available with high-yield savings accounts.
For example, compare an 18-month CD with a 4.50% APY and a high-yield savings account with a 4.75% APY. If you have $10,000 to invest and opt for the 18-month CD, you'll earn $682.54 over the term. On the other hand, if you opt for the savings account, your earnings will depend on the market. Suppose your rate stays the same for three months and then drops by 0.25% in July, September, November, and January. You'll earn significantly less than if you were willing to leave your money untouched in the CD.
That said, while CDs allow you to lock in an APY and earn a guaranteed amount, they also require you to leave your deposit in the account for a certain amount of time. If you need to withdraw it early, account providers typically charge an early withdrawal penalty. Depending on the CD term and lender this can range from 90 days of simple interest (CDs of 12 months or less) to 180 days (CDs of 13 to 47 months) or even a full year (CDs of 48 months or longer).
So if you put $10,000 into the 18-month CD mentioned above but need to withdraw your money after 12 months, you'd have to pay 180 days of simple interest.
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No-penalty CDs offer a potential solution
If you want to invest in a CD but worry that you'll need your money back before the term expires, consider no-penalty CDs.
"A no-penalty CD can offer an attractive rate along with access to the funds, if needed. These are great options for the consumer that wants to earn a higher rate, but still wants the flexibility to access the funds if their circumstances change unexpectedly," says Sarah Wicker, manager of deposit account and IRA services at Georgia's Own Credit Union.
But they're not all upside. "These products do carry other restrictions, so consumers will need to do some research to find the best fit for their financial situation," says Wicker.
For example, some lenders currently offering no-penalty CDs with a 4.70% APY but the terms are limited to seven, 11, or 13 months. You won't be able to lock in the rate for a longer term. Rates tend to be much lower on accounts with no penalties versus ones that have them.
Is a no-penalty CD right for you this spring?
No-penalty CDs offer a way to take advantage of the current elevated APYs without locking up your money. "With rate changes and economic uncertainty, if someone can find these products at a rate they like, now is the time to do it," says Lori Gravitt, assistant vice president and branch manager at Addition Financial.
However, if you're confident you won't need to withdraw your money early, you can find traditional CD options with longer terms, higher rates and fewer restrictions. The better choice for you will depend on your situation, risk tolerance and financial needs.
Either way, this spring is a good time to secure a high rate on CDs. Robert Clements, ChFC, AIF®, partner at FRS Advisors, added, "The consensus was that rates would be cut four to six times this year, which now seems aggressive," says Robert Clements, a partner at FRS Advisors, a financial services and advisory company. Clements says that rates are more likely to be cut three times and not until at least the summer, which makes CDs attractive this spring.
