High-yield savings accounts vs. no-penalty CDs: Which is better now?

As uncertainty around the economy continues and inflation remains elevated, the Federal Reserve decided at its March meeting to keep the federal funds rate as-is for now. While today's higher interest rates make the cost of borrowing more expensive, they're a boon for savers. And, one way for savers to take advantage of the high-rate environment is to put money to work in an account that has a high annual percentage yield (APY). 

Two popular and convenient interest-bearing account options are high-yield savings accounts and certificate of deposit (CD) accounts. While CD account interest rates can provide a nice return, they typically have early withdrawal penalties that can make them less appealing. One unique tool on the market is no-penalty CDs, which cut out that fee and allow you to dip into your CD funds without penalty. 

Let's take a look at high-yield savings accounts vs. no-penalty CDs, which typically have similar APYs, to see how they can help you in the current economic climate. 

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Why a high-yield savings account could be better now 

A high-yield savings account works similarly to a traditional savings account but offers a much higher APY. You can typically find the highest high-yield savings account rates with online banks that have fewer operational costs. In turn, they can offer higher returns. 

"The purpose of a high-yield savings account could be that you're building an emergency fund, or maybe you have a short-term financial goal," says Krystal Adams, chief operating officer at Tucson Federal Credit Union. 

High-yield savings accounts are ideal for consumers looking for:

• Accessibility
• Liquidity 
• No early withdrawal penalties 
• High APY

Be aware, though, that while high-yield savings account interest rates are higher than a traditional savings account, the rate is still variable. In other words, it can change over time and go up or down based on what's going on changes to the overall rate environment. 

High-yield savings accounts provide liquidity but some banks may impose transfer limits. Previously, savers had a six-per-month transfer limit due to Regulation D. That limit was lifted in 2020; however, some banks still have these types of restrictions in place. For example, the Truist One Savings Account charges a $5 fee for every withdrawal over the limit of six withdrawals. Ally Bank has a 10 withdrawal limit on their savings accounts. 

In this era of uncertainty, a high-yield savings account is generally ideal if you want easy access to your funds at a whim and are comfortable trading guaranteed returns via a fixed rate for more liquidity and easier access. 

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Why a no-penalty CD could be better now 

Traditional CD accounts allow savers to lock up their funds for a specific term in return for a fixed interest rate on the account. Adams notes that at credit unions they're often referred to as share certificates. 

In exchange for keeping the money in the account until the CD maturity date, you can secure a fixed, solid APY on your deposit — one that rivals or surpasses what other types of interest-bearing accounts are offering. CD terms range from a few months up to several years. For example, common CD terms are six months, one year and five years. 

One of the major downsides with CDs, though, is that they often come with early withdrawal fees, which come into play if you need to dip into your funds for any reason before the CD maturity date. By accessing your funds before maturity, you forfeit some of your interest earnings in the form of that early withdrawal penalty. The penalty amount varies by financial institution, but there isn't a set maximum. 

No-penalty CDs also give you the opportunity to lock your funds away for a specific period of time in return for a high rate. However, as the name suggests, they don't have the same early withdrawal penalties as traditional CDs. 

"I think the no-penalty [CD] really kind of is a nice middle ground between the higher interest rates of a traditional [CD] and the liquidity of a savings account," says Adams. 

While no-penalty CDs offer more flexibility than traditional CDs, though, they don't quite function the same way as a high-yield savings account, meaning that you aren't necessarily able to just withdraw funds at any point. 

"There could be what's called a waiting period…So when you're comparing the two, there are still some terms and conditions that you're going to want to make sure that you ask your banker about," says Adams. 

That waiting period might not be very long, so it's important to check with the financial institution. Be aware, though, that if you do take this route, you might have one shot to withdraw your funds. 

The big benefit of taking this route, though, is that unlike high-yield savings accounts, CD rates are generally fixed and remain the same throughout your term. In today's high-rate environment, it can be a good idea to lock in that rate for a set term, as it's unclear what could happen with rates in the future. 

"The biggest advantage for a CD is that you lock down an attractive interest rate for a certain period of time. For example, if the Fed is anticipating rate cuts in the next 12 months, then it will make sense to lock in a high interest rate through a CD when you consider your savings," says Wenni Wu, chief growth officer at Piermont Bank.

The power of a no-penalty CD is that you have the opportunity to lock in a great rate without facing early withdrawal penalties. Still, depending on the financial institution, no-penalty CD account interest rates may not stack up to their traditional counterpart.  

"The rates are not as competitive as traditional CDs," says Lakshmi Balasubramanyan, Ph.D., associate professor of banking and finance at Case Western Reserve University.

As a result, no-penalty CDs are typically a good option for people who are saving for a specific goal, like a down payment, a car or a vacation that's down the line. You get to earn higher interest rates for a specific CD term and won't have any CD fees in case things change and you need to access your funds. 

The bottom line 

When comparing high-yield savings accounts vs. no-penalty CDs, it doesn't have to be an either/or situation. You can use both tools in different ways. For example, a high-yield savings account could be used for your emergency fund while you ride out economic uncertainty so you have a buffer. A no-penalty CD can be used to hold a specific amount that you want for a down payment on a home in the future. 

When considering these accounts, be sure to look at the basics so you know the benefits and drawbacks. 

"You want to think in terms of account minimums, fees, interest rates and accessibility," says Balasubramanyan. Additionally, if you've been with your financial institution for a while, you can ask about flexibility with rates. 

"What a lot of consumers don't know is that you can actually work with your bank and say I've been a long-time customer…You can actually work with the bank manager and say, what's the best rate that you can give me?," says Balasubramanyan.