Certificates of deposit (CDs) and savings accounts are two risk-free ways to earn interest on your money. However, they each have limitations on how much or how often funds can be withdrawn.
Understanding the differences can help you make a more informed decision about which savings vehicle is better suited for your financial goals. So read on to learn whether a no-penalty CD or savings account is right for you.
No-penalty CD vs. savings account: What’s the difference?
A CD is a type of deposit account that allows you to earn a fixed interest rate over a specified time period. With a traditional CD, there is a penalty for withdrawing the funds before the maturity date.
A no-penalty CD, on the other hand, gives you greater flexibility in accessing your funds during the deposit term. You can pull out your funds as soon as six to seven days after opening the account without the risk of being charged an early withdrawal penalty or losing out on interest. But once you take the money out, you can’t put it back in.
A savings account is another type of deposit product offered by most financial institutions. You can deposit funds into a savings account as often as you want, but may be limited to a certain number of withdrawals within a month. If you exceed this limit, your bank may charge you an excess withdrawal fee or potentially close your account.
Here’s a recap of how a no-penalty CD compares to a savings account.
Now let’s take a deeper dive into what no-penalty CDs and savings accounts are and how they work so you can decide which option is the best fit for you.
What is a no-penalty CD?
Unlike a traditional certificate of deposit, a no-penalty CD lets you withdraw funds from your account before the term has ended without facing an early withdrawal penalty. This can come in handy if an unexpected expense arises and you need to access your funds sooner than anticipated. This type of CD is also sometimes referred to as a “liquid” or “breakable” CD, says Matt Steenson, head of consumer banking at PNC Bank.
How a no-penalty CD works
No-penalty CDs work similarly to regular CDs and share many of the same features. All CDs earn a fixed rate of interest over a specified period of time, known as the term. CD terms can last from a few months to several years. The date the term ends is referred to as the CD maturity date. Unlike a traditional CD, however, a no-penalty CD does not charge any fees for withdrawing funds before the maturity date.
No-penalty CDs can be found at some banks, credit unions, and online institutions. Interest may compound monthly or annually—the longer the term, the more your balance can grow. Depending on your financial institution, you may also be able to earn a higher interest rate on larger balances, which is known as a tiered rate.
The main benefit of a no-penalty CD is the ability to access your funds any time without risk of losing interest or paying an early withdrawal penalty. However, no-penalty CDs typically don’t allow for partial withdrawals from the account, so you may be required to withdraw the full balance and close the CD if you want to take out money early.
For instance, Steenson explains that if you have $2,000 deposited in a no-penalty CD, and you want to access $500 from that account, you would need to withdraw the full $2,000. Further, you may still have to pay a penalty if you withdraw the funds within the first six days of funding the account, equal to at least seven days worth of simple interest.
Pros and cons of no-penalty CD
No-penalty CDs give you the ability to access your funds when you need them, without early withdrawal fees. But this flexibility may come at a cost. Here’s a closer look at the pros and cons of a no-penalty CD.
Pros
- You can withdraw the funds before the maturity date without paying a penalty
- Earn a guaranteed fixed interest rate, even if rates decline during the term
- No risk to principal
Cons
- Withdrawing funds early usually requires you to withdraw the full balance and close the account
- Rates tend to be lower than for traditional CDs
- Can’t deposit additional funds into the account
What is a savings account?
Savings accounts are basic deposit accounts offered by most banks and credit unions. They allow you to deposit money and earn interest on the balance. You can easily add or withdraw funds in-person at your financial institution, at an ATM, or via an online transfer.
“These accounts are advantageous for consumers looking to separate their cash from their everyday spending and save for goals like vacations or home renovations,” says Steenson.
How a savings account works
Opening a savings account is a fairly simple process and can be completed either through online banking or in person in as little as 30 minutes. After the account is opened, you can deposit funds into the account as often as you like. Previously, federal regulations limited the number of withdrawals you could make to six per month. That rule was suspended in 2020, though some institutions may still have restrictions in place. Your bank may also have a minimum balance requirement to avoid monthly maintenance fees.
As long as your account remains in good standing, your savings account stays open for as long as you choose to keep it and will continue earning interest on the balance. Earning interest in a savings account is similar to how you might have saved money in a piggy bank as a child. “You put all of your coins in one place, and a friend or family member might slip a few coins in when they walk by to entice you to keep saving,” says Courtney Mitchell, head of consumer deposit products at TD Bank. “With a savings account, the bank pays you interest on your balance.”
Interest rates on savings accounts are variable, meaning they can change over time along with general rate fluctuations. Though there’s a possibility of your savings account rate going down; the good news is that when interest rates are rising, you can benefit. Currently, the national average interest rate for savings accounts is 0.37% APY, up from 0.15% APY a year ago, according to the FDIC.
Pros and cons of savings account
Savings accounts offer even more flexibility when it comes to depositing and withdrawing funds. However, they may not earn as much interest as CDs (except in the case of some high-yield savings accounts). Let’s take a closer look at the pros and cons of a savings account.
Pros
- Convenient access to funds, with unlimited deposits and withdrawals in most cases
- Account remains open indefinitely
- No risk to principal
Cons
- Interest rates are typically lower than those offered on CDs
- Rates are variable and can go down at any time
- May have a minimum balance requirement to avoid monthly fees
How to choose between the two
A no-penalty CD may be a better fit if you want to earn higher interest rates and don’t anticipate needing access to the funds for a while—but want the reassurance that you can withdraw your funds early if necessary. On the other hand, a savings account might be better if you want to earn some interest on your savings with fewer restrictions around when you can deposit and withdraw money.
| No-penalty CD | Savings account | |
|---|---|---|
| Type of rate | Fixed | Variable |
| When funds can be accessed | Often beginning six to seven days after funding the account | Anytime |
| Are partial balance withdrawals allowed? | Typically no | Yes |
| Term length | Varies, often around one year | None |
| Type of rate | |
|---|---|
| No-penalty CD | Fixed |
| Savings account | Variable |
| When funds can be accessed | |
| No-penalty CD | Often beginning six to seven days after funding the account |
| Savings account | Anytime |
| Are partial balance withdrawals allowed? | |
| No-penalty CD | Typically no |
| Savings account | Yes |
| Term length | |
| No-penalty CD | Varies, often around one year |
| Savings account | None |
At the end of the day, the type of account you choose depends on your personal financial needs and goals. To make the right decision between the two, Mitchell says, you should consider how much interest you want to earn on your deposit and whether you are comfortable setting aside your funds for a specified time period.
About the contributors
Kaitlyn Koterbski earned a bachelor's Degree from the University of Wisconsin-Madison in personal finance with an emphasis in financial planning and a certificate in entrepreneurship. She currently works as an accounting assistant at WHR Global.
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