The best times to consider a no-penalty CD

There are a number of great accounts you can use to boost your savings balance with high interest today. For savers looking to both maximize their interest and maintain some flexibility to access their funds, a no-penalty CD may offer the best of both worlds.

This type of certificate of deposit (CD) does not charge a penalty fee for early withdrawal (after an initial waiting period of about seven days). It comes with a fixed interest rate, and the term length is usually around one year. While no-penalty CDs often have high APYs, they may not be as high as some other CDs or even the most competitive high-yield savings accounts.

Nevertheless, this unique type of CD can play an important role in your savings strategy. But knowing when the best times are to sign up, can help you best maximize your no-penalty CD.

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Best times to consider a no-penalty CD

Here are a few of the best times for savers to consider adding a no-penalty CD to their financial plan. 

When rates are rising

No-penalty CDs can be a smart way to keep up with competitive APYs when rates are on the rise. 

"Rather than lock in a longer and potentially lower CD rate when interest rates are rising, you could start with a no-penalty CD and then switch later to a traditional CD," says Daniel Kopp, CFP, founder of Wise Stewardship Financial Planning. 

Take today's rate environment, for example. Interest rates are already very high, and the Fed last month decided to pause its ongoing rate hikes. But there have already been signals that the Fed could decide to raise rates again later in the year. If you lock in a long-term CD rate today, you could miss out on potential higher rates to come. But a no-penalty CD could help you start earning on your balance now while you wait to see what the future brings.

"Take note, however, that this comes at a slight opportunity cost, as generally, no-penalty CDs will offer lower interest rates," Kopp says. "You can do some math to compare total earnings under various future interest rate scenarios."

See how much you can increase the amount you earn with a CD by comparing today's top CD rates here.

When you want a fixed interest rate

Scoring a high fixed interest rate with a no-penalty CD over a substantial period of time can be a good way to maximize today's high rates for as long as possible.

Here are a few examples of high-earning no-penalty CDs available as of June 11, 2023:

• CIT Bank: 4.90% APY, 11-month term
• Marcus by Goldman Sachs: 4.35% APY, 13-month term
• Ally Bank: 4.25% APY, 11-month term 

Some high-yield savings accounts may offer slightly higher interest rates right now, but these accounts carry variable interest rates. So when rates inevitably fall in the future, your savings APY is likely to drop as well. By locking in a CD rate, you can guarantee you'll earn it until the end of your term. 

Take the CIT Bank no-penalty CD, for example. If you deposit $5,000 today at 4.90% APY, you'll have over $5,224 by the time the CD matures. It is possible to earn that with a high-yield savings account today, but it's impossible to predict whether the variable APY will go down over the same 11-month period.

When you value both flexibility and earnings

CD early withdrawal penalties can cost up to a few months' worth of interest. Depending on how long you're able to leave your balance in the account before withdrawing early, these penalties can eat up a portion or all of your interest earned. No-penalty CDs, on the other hand, don't charge anything for withdrawing early. If you need to access your money for any reason, you can. 

But the tradeoff is the somewhat lower interest rate. 

"No-penalty CDs often come with the trade-off of a slightly lower yield compared to CDs with a penalty if you cash in before the maturity date," says Trent White, CFP, founder of Omnia Wealth Management. "I generally prefer to keep cash savings very liquid as life is full of surprises and you may need it earlier than anticipated."

For some savers, no-penalty CDs could be best when they're not quite ready to commit to a high-earning CD with a penalty, but they still want to lock in a great rate. Even so, it's always worth considering whether a higher yield could be better for your specific savings goal — even with the added risk of a regular CD.

"If one is certain they will not need the cash for some time, go for the highest-yield CD even if it comes with a penalty," White says.

Find out more about the best CD rates available now here.

The bottom line

CDs and high-yield savings accounts can be a great way to maximize your savings over time — but a no-penalty CD may be the best of both worlds for some types of savers. The best times to open a no-penalty CD may be when rates are on the rise, thanks to the flexibility you'll have to make a withdrawal. But they're also useful when you want to secure a fixed rate without the risk of penalty or when you're not ready to lock in a regular CD, even when they have the highest return.