No-penalty CD vs. savings account: Which should you choose?

When savings rates are high, there’s naturally an uptick in how much Americans shore up their accounts. But how should you get the most bang for your saved buck? No-penalty certificates of deposit (CDs) and savings accounts can offer competitive rates without commitment. Which is best depends on how big of a yield you’re after and how often you want to access your funds. 

What are no-penalty CDs?

No-penalty CDs typically have fixed-rates and predetermined lifespans. They differ from traditional CDs in that you can access your money before the CD’s term is up without an early withdrawal penalty. Most other CD types tend to charge steep fees, which can even eat into your principal. Compared to other certificates, the flexibility of a no-penalty CD is its draw.

Note that no-penalty CD rates, however, are almost always lower than those of high-yield CDs. In exchange for a looser commitment in a CD, you earn less. 

So why make any commitment? No-penalty CD yields can be greater than what savings accounts offer. The national average rate for savings accounts was only 0.45% in June 17, 2024, whereas the USAlliance Federal Credit Union No-penalty CD offers a 4.80% yield on a 11-month term. Annual percentage yields (APYs) are accurate as of February 6, 2024. 

No-penalty CD vs. savings account: The basics

When you store your money in either account type, make sure the institution is covered by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration. Your funds automatically received deposit insurance up to $250,000 per insured institution, per depositor, per ownership category. 

Withdrawal limitations 

While both account types allow penalty-free withdrawals, there are still rules. Typically, with no-penalty CDs, you must wait about a week after funding your account before making any withdrawal and, if you do need to access your funds early, you are often required to withdraw the entire amount and close the CD. (Certificate providers don’t want you using a CD like a savings account.)

Meanwhile, savings accounts are less strict and more liquid. There are no limits on when you can move your money. The largest common stipulations are that you’re often limited to six withdrawals per month and, with credit unions, you must often keep a minimum balance of around $5. 

Deposits

Most savings accounts do not require a minimum deposit and, if so, it’s typically nominal, $25 or less for standard-level accounts. CDs, including no-penalty CDs, can require a minimum balance of hundreds to thousands. 

You also typically can’t add more money to the CD after the initial deposit. Savings accounts may have monthly withdrawal limits, but you can deposit money as often as you want.

Yields

Depending on the term length, no-penalty CDs can offer competitive rates compared to savings accounts — and these rates are fixed, meaning they stay the same until you withdraw your money and close the account. If you lock in a high rate, that’s good. If rates go up after you open a CD, you might feel like you missed out. 

The CME FedWatch Tool reports that the target rate is expected to remain high, around 5.25% to 5.50%, until this summer. Savings accounts typically have variable yields, which can change without warning.

No-penalty CD pros and cons

Pros

• Higher rates than traditional savings. These accounts can have a relatively high yield.
• Greater flexibility than other CDs. No-penalty CDs let you withdraw money for free long before the term is up.
• Low risk. CDs usually come with federal deposit insurance and aren’t subject to market risk, unlike investments such as stocks and real estate.

Cons

• Lower rates than other CDs. As a trade-off of the increased flexibility, no-penalty CDs usually have lower rates than traditional ones. 
• Minimum requirements. CDs often have minimum deposits to open an account, such as $500 or $1,000. And, if you can make withdrawals and keep the CD open, you may still have to meet a minimum balance requirement to earn the quoted rate. 
• Limited deposits. While no-penalty CDs make it easier to withdraw money, you usually can’t add additional funds once the account is open.

Savings account pros and cons

Unlike CDs, savings accounts have variable interest rates. This means the rate on your account can bump up or drop, depending on economic conditions — potentially making it a pro or a con.

Pros

• Greater access than CDs. Savings accounts offer even greater access than no-penalty CDs, allowing you to withdraw as much (or as little) money as you want.
• Interest. Savings accounts typically earn interest — yields on the best high-yield savings accounts compete with CD rates. 
• Low risk. Savings accounts are also not usually subject to market risk and are included in your $250,000-worth of deposit insurance at covered institutions.

Cons

• Rates can be low. Some savings accounts offer low rates. This is especially true for traditional savings accounts from brick-and-mortar institutions.
• Withdrawal limits. Savings accounts often limit the number of monthly withdrawals you can make to six per month.
• Minimum balance requirements. Some savings accounts require a minimum balance to earn the quoted yield or avoid a monthly fee.

Which should you choose?

Whether you should choose a no-penalty CD or savings account depends on your financial needs and goals. Both account types can offer excellent yields, but the best choice depends on what you need from your account.

A no-penalty CD is a great option if you want a competitive, fixed interest rate and the ability to pull your funds without penalty if you need them. Whereas a savings account is a better choice if you prefer more flexibility. You can deposit and withdraw money at any time and still earn a high yield, depending on the account. 

Keep in mind that you could choose to have both accounts. You may put a greater portion of your funds in one or the other depending on your needs. 

Frequently asked questions (FAQs)