Comparing No-Penalty CDs vs Savings Accounts

Q: Are no-penalty CDs worth it?

Your personal circumstances may dictate whether a no-penalty CD is right for you. You may evaluate the pros and cons associated with no-penalty CDs to reach a determination. We’ve highlighted some of those pros and cons in the sections above.

Q: What is the point of a no-penalty CD?

One of the points with no-penalty CDs is to potentially earn a competitive APY, and the other point is to eliminate the risk of early withdrawal penalties. You may earn interest and face no early withdrawal penalties by opening a no-penalty CD account.

Q: Do you get penalized for taking money out of savings?

Some banks may charge transaction fees if you frequently transfer funds from your savings account. You may face penalties if you take money out of your savings account more than six times in a monthly statement period. Your deposit account agreement may disclose whether penalties may apply for frequent savings account withdrawals.

Sulaiman Abdur-RahmanUpdated March 9, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

A no-penalty certificate of deposit (CD) and savings account are banking products with some similarities and differences. The difference between no-penalty CD and savings account products is generally their annual percentage yield (APY) and terms of withdrawal.The no penalty CD vs. traditional saving account can both earn interest on your deposits, but the interest rate may be variable on savings accounts and fixed on no-penalty CDs. No-penalty CDs may offer more competitive APYs on average, and the withdrawal terms on a no-penalty CD vs. savings account may also be different.Withdrawing funds from a no-penalty CD may require that the customer withdraw 100% of the funds, whereas a savings account customer may have greater flexibility over withdrawals. Below we highlight the similarities and differences between a no penalty CD vs. savings account.

What Is a No-Penalty CD?

A no-penalty CD is a banking product that may earn interest on your deposits. No-penalty CDs typically have a maturity term length in which you may withdraw your funds early without facing any penalties.A no-penalty CD with an 11-month term, for example, would reach maturity after 11 months. A customer at the end of the term may transfer the funds to another account or renew the CD for another term. There’s no penalty for early withdrawals, but customers may have to liquidate the entire account.No-penalty CDs may prohibit partial early withdrawals, so customers who wish to withdraw early may have to withdraw 100% of their funds. A bank or credit union may prohibit early withdrawals during the first six days of opening your CD account.

No-Penalty CDs vs Savings Accounts

How is a no penalty CD different from savings account products? The below table highlights the similarities and differences between a no penalty CD vs. savings account:

No-penalty CD	Savings account
May earn interest over a set term until the certificate reaches maturity	Account may remain open indefinitely and may earn interest throughout the life of the account
APY may include a fixed interest rate	APY may include a variable interest rate
No penalty for early withdrawals	Banks may charge transaction fees if you withdraw or transfer funds more than six times in a monthly statement period
Financial institutions may prohibit partial early withdrawals	Partial withdrawals are allowed
No withdrawals may be allowed during the first six days of account opening	You may open the account with a $0 deposit and may withdraw funds at any point
Funds may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration up to $250K	Funds may be insured by the FDIC or NCUA up to $250K

How No-Penalty CDs Work

How no-penalty CDs work is similar to creating a savings account. A no-penalty CD vs. savings account are two distinct banking products offered by banks and credit unions.Similar to how savings vs. checking accounts have differences, there are key differences between a no penalty CD vs. traditional saving account. How is a no penalty CD different from savings account products? The difference between no penalty CD and savings account products is their interest rate structure and withdrawal terms.A no-penalty CD may earn a fixed rate of interest over a set term until the certificate matures, and there’s no penalty if the customer takes an early withdrawal.A savings account may earn a variable rate of interest throughout the life of the account remaining open, and customers may face transaction fees if they transfer or withdraw funds more than six times in a monthly statement period.

Pros and Cons of No-Penalty CDs

The below table highlights some of the pros and cons of no-penalty CDs:

Pros	Cons
May earn a fixed rate of interest on your deposits	Fixed rate of interest may not increase if market rates go up with inflation
No penalty for early withdrawals	Partial early withdrawals may be prohibited
Deposits may be insured by the FDIC or NCUA up to $250K	Account may require a minimum deposit to open
Certificates can have relatively short terms to reach maturity	Early withdrawals may be prohibited in the first six days of account opening
You may renew the CD, withdraw some of the balance, or transfer funds to another account when the CD matures	Account terms may prohibit you from making additional deposits once the term begins

No-Penalty CDs vs CDs

The main difference between a no-penalty CD and traditional CD is that traditional CDs may impose early withdrawal penalties. Customers with no-penalty CDs may take early withdrawals without facing any penalties.No-penalty CDs typically feature short terms of less than 12 months, whereas traditional CDs may feature terms of up to 60 months. A customer with a traditional 18-month CD who takes an early withdrawal on the principal may face a penalty equal to 180 days of simple interest at the current rate.Recommended: Certificate of Deposit (CD) vs Savings Account

Which Is Right for You?

A no-penalty CD is just one of the many types of bank accounts you may consider. Your personal circumstances may dictate which banking product is right for you. You may compare different savings accounts and explore other banking options, such as:

The Takeaway

A traditional savings account may offer more flexibility than a no-penalty CD. When comparing a no penalty CD vs. savings account, both options may earn interest on your deposits. A traditional savings account allows partial withdrawals at any point, whereas a no-penalty CD may prohibit partial early withdrawals.If you’re looking to earn interest on your savings, Lantern by SoFi can help. Our online banking marketplace allows you to compare APYs and choose a bank account that’s right for you.Compare high-interest savings accounts with Lantern.

Frequently Asked Questions

Are no-penalty CDs worth it?

What is the point of a no-penalty CD?

Do you get penalized for taking money out of savings?

Photo credit: iStock/Andrii Dodonov

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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