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Certificates of deposit (CDs) can be a good place for people to keep their savings as they offer the security of FDIC insurance and a guaranteed rate of return. However, with most CDs, if you need to withdraw your money from the account before the end of the agreed term, you have to pay an early withdrawal penalty. To avoid this penalty, you can subscribe to a “CD without penalty”, also called “liquid CD”.
Here’s how CDs work without penalty and when they may be the right choice for your savings.
How do CDs work without penalty?
Regular CDs require you to keep your money deposited into the CD account for a specific length of time, such as six months, 12 months, or 60 months. But a penalty-free CD gives you the option of withdrawing your money (usually after a short time after the account is funded), without having to pay the early withdrawal penalty.
Penalty Free CDs give you the security and guaranteed APY of a traditional CD without the risk of penalty. Early withdrawal penalties vary by bank and the length of the CD, but typically amounts to a few months of interest income. Paying this penalty may reduce your return. If you want some of the same guarantees as a regular CD, but with extra liquidity, consider getting a CD without penalty.
If you have a financial emergency during the life of the CD, or if you find something else that you would like to invest the money in during that time, you can access your money without penalty.
How Can Penalty Free CDs Help Your Finances?
Because they don’t charge an early withdrawal penalty for accessing money before the CD’s maturity date, penalty-free CDs provide more flexibility and options for what you can do with your money. You can put your money in a CD with no penalty and earn a guaranteed APY, but if you decide you want to do something else with the money, or if you are not sure when you will need the money, you can easily withdraw your money and put it to use in other areas.
For example, with a CD without penalty, you have the option of:
- Take your money out of the CD and invest in other assets instead. If you are feeling uncertain about your investment plan, a penalty free CD can be a good place to keep extra cash while you decide how and when to invest your money in the markets.
- Save for a big purchase, even if you don’t know when you’re going to need the cash. Save yourself for a deposit on a house or a new car? If you’ve got a big purchase on the horizon, but you’re not sure when you’re ready to buy, you can put your savings in a CD without penalty and earn a stable APY while you wait to find the right home. or choose the right vehicle. Once you’ve found your dream home or car and you’re ready to bid, you can withdraw your money from your CD without penalty.
- Get a better return on your emergency savings fund. Depending on the bank or credit union, a CD without penalty may give you a higher return than a typical savings account, as far as where you save your emergency savings. CDs aren’t usually as liquid as savings accounts, but penalty-free CDs give you an added level of flexibility.
What are the advantages of CDs without penalty?
Penalty-free CDs offer some of the same benefits as regular CDs, as well as some of the benefits of a typical bank savings account:
- Security provided by FDIC. CDs without penalty are generally FDIC insured up to a limit of $ 250,000 per depositor, for each category of account holder, in the event of bank failure. Penalty Free CDs are a safe place to keep your money.
- A guaranteed rate of return. CDs without penalty, like other CDs, can pay a higher APY than a bank savings account.
- Easy access to your money. Penalty Free CDs allow you to withdraw money at any time, without penalty for early withdrawal.
Penalty free CDs, in a way, offer the best of both worlds. You can potentially get a higher APY than you would earn with a regular savings account, while still maintaining a similar level of flexibility and access to your money.
What are the limits for CDs without penalty?
Just like with other CDs or financial products, there are a few possible complexities and limitations that you should be aware of before purchasing a CD without penalty:
- The APY on CDs without penalty may be lower than on regular CDs. Due to the added flexibility they offer, penalty-free CDs may yield slightly lower returns than best CD rates. The bank asks you to accept a lower rate in exchange for the convenience of withdrawing your money without penalty.
- Other savings account options may have higher rates. CDs without penalty may not pay as high an APY as some of the best online savings accounts. Shop around to see which bank is offering the best deal on your savings.
- You can find limits in the fine print. Check if there is a limit on the number of penalty-free withdrawals you can make or a limit on the amount of money you can withdraw from your CD without penalty. Not all banks have the same rules for their penalty free CDs, so make sure you understand the implications before signing up.
Which banks offer CDs without penalty?
Here are some of the banks that offer CDs without penalty. APYs and account details are correct as of October 14, 2021:
When does a CD without penalty make sense?
If you want a safe, cash place to keep your savings, a penalty-free CD might be the right choice for your financial goals. You can use a CD without penalty for many different reasons: to save for a specific purchase, for a vacation, for a down payment on a house, or to keep your emergency savings fund.
However, if you want a higher return on your savings, penalty free CDs may not pay as much as a regular CD or even a regular high yield online savings account. Depending on the bank, you may be able to get a higher APY with a money market account or a high yield online savings account.
Penalty-free CDs can be a good option if you want the security and stability of a traditional CD, but without the risk of early withdrawal penalties. Just make sure you’re getting the best APY you can and read the fine print to understand the rules and limits for penalty free withdrawals. And before signing up for a penalty free CD, shop around for rates on other types of savings vehicles that might meet your needs.