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The Federal Reserve is expected to lower its rates at its next meeting on September 17 and 18. The Fed is the central banking system of the U.S., so if it drops its rates, the best CD rates and high-yield savings account rates drop too.
If you want to lock in a great rate before rates start to drop too far, a no-penalty CD can be a great way to continue earning a good interest rate while giving you a bit of flexibility to access your funds in case of an emergency.
Since the Fed is expected to cut rates soon, CDs offering 5% interest can help you earn high interest rates for longer than you could otherwise. But there's a catch.
"The biggest drawback is, with traditional CDs, there is a penalty if you withdraw from that CD before that period of time that you've locked in that interest rate," says Chloe Moore, CFP® professional and founder of Financial Staples. For example, if you open a 5-year CD with $25,000 and withdraw $10,000 three years in, you might lose 180 days of interest on the amount you withdraw. This makes it risky to open a CD with money that you might need before the term length is up.
No-penalty CDs are an exception to this rule, though. They can help you circumvent that risk by offering more liquidity than a traditional CD at the cost of slightly lower interest rates. "A no-penalty CD — it basically gives you some flexibility to withdraw your money at any time after some period that you've held a CD, so you can keep the interest that you've earned with no penalty," says Moore.
If you're hoping to lock in a great interest rate but don't know if you'll need the money before the term length ends, a no-penalty CD could be a great option.
"There are certain times where you can lock in a CD at a higher rate than you would get a money market or a savings account," says Moore. "The high-yield savings accounts would fluctuate, or have the potential to fluctuate, over time as interest rates change, and with a CD, you're locking it in for the number of months or years that you purchased that CD for," Moore adds.
For example, if you open a Climate First Bank 6 Month No Penalty CD with 5.24% annual percentage yield, you'll keep earning that rate until the 6-month CD term is up. If you open a high-yield savings account, like the EagleBank High-Yield Savings Account, the current interest rate is 0.01% to 5.35% APY. However, high-yield savings account rates could change at any time during the next six months.
No-penalty CDs differ in interest rate, term length, and withdrawal rules. Some no-penalty CDs only let you withdraw all of your money once during the 3-month CD term without penalty. Other CDs, like the Climate First Bank 6 Month No Penalty CD (5.24% APY), let you withdraw money freely throughout the term without requiring you to withdraw the entire balance. Other CDs might not make you withdraw all of your money at once, but put limits on how many times you can withdraw money during the term length.
While no-penalty CDs can be a great choice for the current market, they're also a lot of extra work compared to high-yield savings accounts. "Just consider the value of your time," says Moore. "I've had some clients go around and chase interest rates and open up accounts at different institutions to get maybe a quarter of a percent higher, and just the time it takes to open up a different account or to set up a CD ladder or do all these different things, if you're not talking about a significant amount of money, then it just might not be worth the hassle."
Once interest rates are more stable, a high-yield savings account will likely offer rates that are on par with no-penalty CD rates without the need to track term lengths.
