No-Penalty CD vs. Savings Account: Which Is Better?

It's more than just the APY

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Savings accounts let you deposit and withdraw as much money as you want, typically whenever you want (some banks restrict certain types of withdrawals to six per month). A no-penalty CD is often seen as a way to earn a slightly higher interest rate than with a savings account, but in turn, you're much more limited as to when you can make deposits and withdrawals. If you're trying to decide between the two, we'll help by highlighting some important differences.

What’s the Difference Between No-Penalty CDs and Savings Accounts?

  Savings Accounts No-Penalty CDs
APY Usually slightly lower Usually slightly higher
Changing APYs Can change at any time Does not change 
Limits on Deposits No limits; whenever you want, in any amount Once open, you can’t deposit any more money
Limits on Withdrawals Six withdrawals per month, in any amount No withdrawals are allowed until the term ends or you make an early withdrawal
Availability Available at any bank or credit union Less commonly available

APY: Savings Accounts vs. No-Penalty CDs

Both savings accounts and no-penalty CDs are usually some of the lowest-yield accounts at banks and credit unions. The interest rates on no-penalty CDs are often a tad higher than with savings accounts, however.

If earning the best rates on your savings while keeping it readily available is your goal, look for an online bank or credit union. The difference between the rates that online and brick-and-mortar financial institutions offer is generally larger than the difference between interest rates on savings accounts and no-penalty CDs within the same bank.

Changing APYs: Savings Accounts vs. No-Penalty CDs

One of the benefits of a traditional, fixed-rate CD is that once it's open, the rate doesn't change (unless you have a bump-up CD or a step-up CD). This can be handy if you think rates are high now but will go down soon. It lets you lock in a better rate today than you might get in the future with a savings account.

If you have a savings account, on the other hand, your rate can change at any time. If rates go down, you'll earn less interest—but if rates go up, you'll earn more.

Limits on Deposits: Savings Accounts vs. No-Penalty CDs

There are no limits on savings accounts for how often you can make deposits, or how much they have to be. Still, it's good to be aware that some banks have minimum balance limits. These tend to be more common on higher-yield savings accounts. If you're a super-squirreler, it's also good to keep your savings account balance below $250,000, the limit for FDIC insurance.

When you open a no-penalty CD, on the other hand, it's meant to be a hands-off savings account. Once you open the account, you can't make any additional deposits until the account is closed, either because its term ended or you withdrew the money early. At that point, the only thing you can do is open another CD.

Limits on Withdrawals: Savings Accounts vs. No-Penalty CDs

No-penalty CDs are much more restrictive when it comes to withdrawals. You can only make one withdrawal, and when you do, you must withdraw the entire CD balance. Normally, CDs charge you an early withdrawal penalty, but with a no-penalty CD, you don't have to pay this fee.

Savings accounts, on the other hand, are more flexible. You can make up to six withdrawals per month for the most common types of withdrawals, which include things such as ACH transfers, bill payment services, and overdraft protection transfers. When you make these withdrawals, you can withdraw any amount you want, from one cent all the way to your entire balance.

The monthly limit of six withdrawals per month from a savings account has been suspended due to COVID. As of publication, it hasn't been reinstated yet.

Availability: Savings Accounts vs. No-Penalty CDs

Savings accounts, along with checking accounts, are the twin pillars of any person's financial toolkit. You can find checking accounts and savings accounts at just about any bank or credit union.

If you're interested in a no-penalty CD, however, you'll have to look a bit harder. Since they're a bit more unique, they're not offered at every bank or credit union. If you want to keep all your bank accounts with the same institution, look for a bank that offers a no-penalty CD first. Otherwise, you may need to open a separate no-penalty CD account with a different institution than your everyday bank.

Which Is Right for Me?

Savings accounts and no-penalty CDs are great ways to save, and determining which one is best for you depends on your financial goals and intended usage. Here are some questions to ask yourself that can steer you toward one option or the other:

  • Do I have a lump sum of money I won't need for a bit? Since you can't make regular deposits and withdrawals from a no-penalty CD, a savings account would be a better option if you're still working on saving up.
  • Do I want to lock in my rate now? If you think rates will be going down soon, a no-penalty CD can allow you to lock in the rate that's currently being offered for a bit longer.
  • Do I want the most convenient option? You'll need to search a bit more to find a no-penalty CD, and chances are you'll have to open it at a different bank than the one that houses your traditional accounts. If you don't want that hassle, choose a savings account.
  • Do I want to earn the most interest and still have access to my money? No-penalty CDs usually offer higher interest rates than savings accounts, but this isn't always the case.

Best-of-Both-Worlds Option

You don't necessarily have to choose between a savings account and a no-penalty CD. You can open both types of accounts if you wish.

If you've already built up enough savings to meet the minimum opening requirements for a no-penalty CD, you can open this account and let it sit while you keep making regular deposits to your savings account. When your no-penalty CD matures, you can roll it over into a new one with the savings you've built up in the meantime.

The Bottom Line

You're not alone if you're trying to figure out how to earn the highest rates of return from your savings while still having access to your cash. It might be worth considering other options, such as money market accounts or even CD ladder strategies, which tend to offer higher rates.

Frequently Asked Questions (FAQs)

Which offers higher rates—a no-penalty CD, or a savings account?

Often, no-penalty CDs have slightly higher interest rates than savings accounts, but that's not always true. Sometimes, they're the same. Online banks and credit unions generally offer much higher rates on both savings accounts and no-penalty CDs than brick-and-mortar banks.

What's the difference between a savings account, a CD, and a no-penalty CD?

A savings account lets you deposit and withdraw money without restrictions. With a CD, you can't deposit more money or make withdrawals until its term is over, unless you pay an early withdrawal fee. If you do, you have to withdraw the entire balance, even if you don't need it all. No-penalty CDs waive the early withdrawal penalty, but they often offer slightly lower rates than regular CDs.

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