No-Penalty CD vs. Savings Account: What's the Difference?

You'll have to choose between more liquidity or higher interest rates.

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No-penalty certificates of deposit (CDs) and savings accounts both provide secure paths to earning interest on your money. While a CD often generates more interest than a savings account, you'd have to make the trade-off between access to your cash and maximizing growth. Understanding the pros and cons of each account type will help you determine the best fit for your financial profile.

What is a no-penalty CD?

A no-penalty CD, or liquid CD, is like any CD with a fixed rate and term length, but you can withdraw your funds before the CD matures without incurring a fee. Although there are withdrawal restrictions and deposit limits, depositors can withdraw the entire balance, starting the week after they fund the CD, without incurring an early withdrawal penalty. The best no-penalty CDs typically earn a higher annual percentage yield (APY) than a regular savings account, though they may be lower than those of traditional CDs. 

Pros of a no-penalty CD

  • Secure: No-penalty CDs are one of the safest places to store your money as long as your bank is backed by the Federal Deposit Insurance Corporation. If your bank shuts down, FDIC coverage will protect your money up to $250,000. 
  • Guaranteed returns: A no-penalty CD offers a fixed annual percentage yield, or APY, which is how much interest you collect on your investment. The APY is often higher than you'd get with a traditional savings account.
  • Easy access: You can withdraw the entire balance as soon as one week after you fund the CD without incurring an early withdrawal penalty.

Cons of a no-penalty CD

  • Withdrawal restrictions: Depending on when you make a deposit, you may have to wait up to a week to withdraw funds. Additionally, you may not be allowed to make partial withdrawals. 
  • Lower rates than traditional CDs: The APY for no-penalty CDs are usually lower than other CDs to make up for its liquidity. 
  • Funds can't be added: Additional funds generally can't be added to a no-penalty CD once the account has been opened. 

What is a savings account?

savings account is another interest-bearing deposit account held at a bank or credit union. Savings accounts earn variable interest, meaning rates can change at any time based on the market. Many savings accounts have low or no minimum deposit requirements. 

Savings accounts typically have some limitations on how often you can withdraw funds. Still, they provide exceptional flexibility and are ideal for building an emergency fund or saving for a short-term or long-term goal. 

Pros of a savings account

  • Secure: Like a no-penalty CD, savings accounts from FDIC- or NCUA-insured banks and credit unions are insured for up to $250,000 per depositor. 
  • Interest on deposits: Unlike most checking accounts, most types of savings accounts earn a yield, which helps your money grow over time.  
  • Easy access: While there may be limitations on how frequently you can withdraw funds from a savings account, withdrawals and deposits are much more straightforward than with a CD. 

Cons of a savings account

  • Fees: Fees vary by bank, but they may include a monthly service fee, minimum opening deposit (typically between $10 and $100), charges for going below a minimum balance requirement and ATM fees.
  • Withdrawal limits: Savings accounts provide relatively easy access to your money, though there may still be some restrictions.
  • Variable interest rates: If market interest rates go down, so does your APY. 

The bottom line

Consider the flexibility, interest rates, withdrawal limits and fees associated with each option to determine what is best for your financial goals. Ultimately, no-penalty CDs are an excellent option for those that want to take advantage of higher yields and free access to funds with fewer restrictions. At the same time, savings accounts are ideal for those that need more flexibility and the ability to access their funds regularly.

Correction, 7:30 a.m. PT Jan. 25: A previous version of this article stated that savings accounts are FDIC-insured for up to $250,000. For greater clarity, savings accounts from FDIC- or NCUA- insured banks and credit unions are insured for up to $250,000 per depositor. The previous version of this story also said that savings accounts earn a yield. While most savings accounts earn a yield – albeit a modest yield – there are some accounts that are noninterest savings accounts (they usually come with other perks).