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Which Is Better, a No-Penalty CD or a High-Yield Savings Account? It Depends

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

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No-penalty CDs and high-yield savings accounts have a lot in common.

Right now, both offer competitive annual percentage yields of APYs. And you won’t have to worry about paying a withdrawal fee for taking money out if you need it. More importantly, both accounts are usually FDIC- or NCUA-insured up to $250,000 per depositor, per bank. 

But there are some big differences between no-penalty CDs and high-yield savings accounts, including the number of deposits you can make and different interest rules.

Read on to determine whether a no-penalty CD or high-yield savings account is best for you. 

What is a no-penalty CD?

A no-penalty CD is a certificate of deposit that allows you to withdraw money before your term ends without paying an early withdrawal penalty. If you opened a one-year no-penalty CD, for example, and needed to withdraw your funds nine months into the term, you wouldn’t have to worry about paying an early withdrawal fee (in most cases). Plus, as of May 18, the banks we track at CNET offer no-penalty CD APYs over 4.00% -- a rate on par with high-yield savings accounts. 

Sounds good, right? There are still some drawbacks to consider. 

“Read the fine print on no-penalty CDs, because there are cons,” said Alvin Carlos, a certified financial planner at District Capital

  • Not offered at all banks: Some banks only offer no-penalty CDs for select terms, such as 11 or 14 months -- and some banks don’t offer this CD type at all. 
  • Lower APYs than some other CDs: The APY usually isn’t as high as high-yield CDs.
  • Early penalty-free withdrawal isn’t instant: “You can withdraw the full balance and interest anytime without penalty only after six or seven days,” said Carlos. 
  • Advance notice can take time: “You usually need to give your bank advance notice before withdrawing cash,” Carlos said. It’s not as easy to pull out as it is with a regular savings account. 
  • You’ll miss out on interest: “If you need to withdraw money, you need to take out the entire amount,” says Carlos, causing you to lose interest on the money you didn’t really need to withdraw.

What is a high-yield savings account?

A high-yield savings account acts like a traditional savings account you would find at a big bank. You can withdraw, deposit and contribute funds regularly. But high-yield savings accounts typically offer higher interest rates. Right now, most savings account rates are upward of 4.00%, and since the latest Federal Reserve rate hike, there’s a chance that APYs will continue to climb on these accounts.

“People tend to set up savings accounts with the same financial institution where they have an existing checking account -- typically out of convenience,” said Terry Turner, a financial wellness facilitator at Annuity. “But, you can still set up electronic transfers between your checking account with your regular bank and an online-only bank’s high-yield savings account to simplify moving your money while taking advantage of a higher percentage yield.”

There are still a few points to keep in mind. Usually, only online banks offer high-yield savings accounts -- except for a handful of credit unions and major banks. That’s because online banks don’t have the high overhead costs that financial institutions with physical branches have, allowing them to pass on these savings to consumers in the form of better savings rates. But that also means you’ll need to be comfortable with managing your money online. 

“There are hardly any drawbacks to a high-yield savings account,” said Carlos. But there are a few factors worth considering.

  • Withdrawal limits: While most banks suspended Regulation D, which limits the number of transfers, some banks still have the regulation in place. That means if you make more than six transfers during a given period, there may be an excessive withdrawal fee each time. 
  • Cash deposits and withdrawals: Some banks do not allow cash deposits or withdrawals, so you’ll need to electronically transfer money between accounts. 
  • Variable rate: A high-yield savings APY is variable -- meaning it can change at any time. Therefore, your return is unpredictable, since your rate can go up or down overnight.

Read more: Your Kid’s Savings Can Benefit from Today’s High Savings and CD Rates

Choosing between a no-penalty CD and a high-yield savings account

Both accounts can help you earn interest on your savings. And while both are low-risk options, there are still some clear differences. Here’s how to decide:

  • Will you need to make regular contributions? If so, you’re better off with a high-yield savings account since you can deposit money anytime. Most no-penalty CDs only let you make an initial, one-time deposit. 
  • Are you worried about interest rates going down? If so, you can lock in a no-penalty CD with a fixed interest rate now, in case rates go down. “The best high-yield savings account APYs can change from month to month and are affected by several market conditions,” said Turner. 
  • Is it money you’ll need on a whim? If you’re saving for your emergency fund or money for repairs, it’s best to have the money easily accessible in a high-yield savings account to permit transfers quickly. Some no-penalty CD withdrawals aren’t as fast and may take a few days, said Carlos. 

The main point when deciding between the two is whether you’re more committed to earning money on your savings or having savings you can tap into if you need it relatively quickly,” said Turner. “Putting it in the CD guarantees you the rate of return for the full term; putting it into the savings account gives you greater access when you need it.”

The bottom line

In short, both no-penalty CDs and high-yield savings accounts have their advantages. “The no-penalty CD lets you lock in a fixed interest rate for the CD’s term, but you still give up some access to your money if you need it,” said Turner. “The high-yield savings account will likely have a variable interest rate -- which could drop -- but you have more access to your money.”

Correction: An earlier version of this article was assisted by an AI engine, and it mischaracterized some aspects of savings accounts. Those points were all corrected. This version has been substantially updated by a staff writer.

Dashia is a staff editor for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.
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