Investing in CDs in 2024? Here's How to Avoid One Big Problem

Certificates of deposit (CDs) can be a good choice for some savings goals, but you need to prepare for one significant downside: early withdrawal penalties. That's right -- if you take your deposit out of the certificate too soon, the bank will charge you a penalty.

Fortunately, if you want to avoid the early withdrawal penalty problem, there is a solution called "no-penalty CDs." Let's take a closer look at how no-penalty CDs work and why they could be the right fit for your cash savings.

Early withdrawal penalties: Why they happen and how to avoid them

When you open a CD, the bank is counting on you to commit your cash for a certain length of time, or "term." Banks (and credit unions) charge penalties to incentivize customers to keep their money deposited as part of the CD agreement.

The exact amount of early withdrawal penalty depends on the bank and the term of your CD. But here are a few examples from banks that we researched:

• Three months of interest for early withdrawals from CDs of up to 12 months
• 60 days of interest on CDs with terms of two years or less

Depending on when you pull your money out of the CD, you could lose most of the interest you've earned. The best way to avoid an early withdrawal penalty is to leave your cash alone and let it grow throughout the full term of the CD. But not everyone's personal finances will allow for that. Sometimes your circumstances change, and you need emergency access to savings that you thought were "non-emergency."

The second best way to avoid early withdrawal penalties is with a no-penalty CD.

No-penalty CDs: What they are and how they work

Usually when you open a traditional CD, you are making a trade-off with the bank. You're getting a guaranteed rate of interest for a certain length of time, and the bank is getting the certainty of knowing that it will have your deposits for a certain length of time. Because of this consistency of access to deposits, banks are often willing to pay higher APYs for CDs than they pay for savings accounts.

As a banking customer, CDs can be a good fit for your goals if you want a higher-than-usual APY and are not afraid to commit your money for a certain "term" of time. But you lose something important with a typical CD: flexibility. When you have to pay a penalty to access your cash, this can hold you back from making other investments or doing other useful things with your money. Don't open a long-term CD unless you are confident that the higher yield on your savings is worth locking up your money.

No-penalty CDs are a way to get the best of both worlds: you can get a high APY like the best CDs, but still enjoy flexibility for when to access your cash, like a regular savings account.

Not every bank offers no-penalty CDs, and not all no-penalty CDs work the same way. Some no-penalty CDs will require you to leave your money in the account for six or seven days after opening the CD. Others will only allow you to withdraw a certain amount of your original deposit without penalty. Some other financial institutions only allow you to make early withdrawals from your no-penalty CD during a few dates per year.

Where to get no-penalty CDs

If you think no-penalty CDs could be the right fit for your savings goals, several banks and credit unions offer these flexible ways to invest your cash. And some no-penalty CDs have some special benefits that make them an even better choice for your savings.

Here are a few no-penalty CDs available now (as of Feb. 14, 2024):

Is there a downside to no-penalty CDs?

Not every no-penalty CD has a competitive APY compared to traditional CDs. If you want flexible access to your cash, you will usually have to accept a slightly lower APY than you'd get from the best CD rates. For example, the Ally Bank No-Penalty CD offers 4.25% APY (11-month term), while the standard Ally Bank 12-month CD offers 4.65% APY.

No-penalty CDs also might not give you a much better APY than the best high-yield savings accounts. Currently, the best savings accounts are offering up to 5.11% APY.

Bottom line

If you're thinking about investing in CDs, make sure you have a high level of confidence that you can leave that cash in the bank until the term is done. If your personal finances change and you need sooner-than-expected access to your deposits, a no-penalty CD could protect you from early withdrawal penalties. No-penalty CDs don't always offer the highest APY, but they can give you security and flexibility while helping your savings grow.