Best no-penalty CDs for 2024
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Updated: December 29, 2023
Bank customers – and that’s us, right? – don’t take kindly to getting dinged by service charges, overdraft fees, ATM surcharges: fees or penalties of any kind, really. But as competition for deposits continues unabated, banks have figured out one way to attract clients: get rid of the penalty for early withdrawal on a popular product, the certificate of deposit.
Here we’ll take a look at three banks that offer no-penalty CDs and explain how these products work, while offering some observations about what makes them so attractive in today’s inflationary landscape. Are they right for you? Read on and see for yourself whether they belong in your savings and investment portfolio.
CIT Bank
CIT Bank has an unusual term for its no-penalty CD: 11 months as opposed to a year. One way to look at it is that you’ll reach full maturity a month early should you want to move the money elsewhere.
An online-only bank, CIT offers generous interest rates. Along with traditional CDs, CIT offers long-term RampUp CD products that let you adjust your APY if rates increase, jumbo CDs for deposits of $100,000 or more and of course, no-penalty CDs.
Beginning on the seventh day after creating the CD, you can withdraw your total balance – including any interest earned – without worrying about fees. CIT requires a minimum deposit of $1,000 for these CDs, unlike competitors such as Ally Bank.
Here's the current rate for these 11-month certificates of deposit:
Clearly, this is a particularly good deal if you have between $1,000 and $5,000 to invest (beyond which Ally's APY is higher).
CIT Bank. Member FDIC.
Ally Bank
Once upon a pre-Internet time, Ally Bank was the brick-and-mortar General Motors Acceptance Corporation, founded in 1919. Today’s it’s a much beloved bank that holds it own with low or no fees, generous interest rates and handy online features. Now fully online, Ally passes the savings of lower overhead to you. This means they can eliminate fees and pay higher-than-average interest in savings accounts, money markets and CDs.
Like CIT, Ally offers an 11-month no-penalty CD and its APY has increased dramatically since the summer: more than three times the 1.30% offered as of July. Ally’s no-penalty CD has no required minimum and the APY stays consistent no matter how much you deposit.
That's better than what you'll earn with many traditional CDs at brick-and-mortar banks.
Keep in mind that you must wait six days after opening the account before you can withdraw the entire balance. When your Ally No Penalty CD comes to maturity, you can also choose to have it automatically renewed at a potentially different APY.
Marcus
The Marcus product from Goldman Sachs is a bit different from those offered by Ally and CIT. For starters, it requires that you start your CD with a $500 minimum balance. And to get the most benefit from it, the 13-month option is by far your best bet.
The current APY on the Marcus no-penalty 13 month CD is 4.60% APY, a healthy rate that puts it right in the hunt for yield-conscious consumers. But go for a shorter term — even by two months — and the rate ranks right up there with scrounging for pennies on the sidewalk.
While it’s puzzling why the 13-month CD pummels the 7- and 11-month CD products, the no-penalty feature means that going for the longest term is a no-brainer:
What is a no-penalty CD?
As the interest rate you earn is higher than with standard savings accounts, certificates of deposit are in general a wise option. But the rigid “penalty for early withdrawal” rules turned off many consumers in the past. Enter the no-penalty CD, which is becoming ever more popular. But how does it work, exactly?
First off, there’s no such thing as a truly no-penalty CD. The FDIC requires banks to charge a penalty if someone withdraws their money in the first six days that an account is open. But after that, banks have leeway to do as they see fit; in fact, the FDIC asked banks to waive all penalties during COVID, which explains in part how no-penalty CDs gained momentum.
In the no-penalty scenario, though, the interest rates may be lower than with standard CDs. Consumers must meet certain conditions as well. Depending on the bank, only current account holders may be eligible, or cashing in the CD before maturity must take place during certain windows of time. Thus, zero penalty doesn’t equal maximum liquidity.
Pros and cons of no-penalty CDs
Of course, the lack of penalties for early withdrawal is a huge plus. They also boast better interest rates than most standard and high-yield savings accounts. And overall, the Fed rate hikes have meant a bonanza for fixed income investments. CDs in general and no-penalty CDs may even outperform the stock market — which some are now calling a bear market — once 2023 is over. And if the Fed hikes rates again (and again), CD rates stand to rise.
There are some downsides, though, as with almost any savings vehicle. If you’re pulling money out of stocks, or otherwise dissing stocks out of pessimism, know that any investment in a no-penalty CD is at best a short-term play. Over longer time horizons, the stock market will always outperform any CD or savings account. The S&P has averaged a return of 10.16% per year dating to 1926, according to officialdata.org.
Are no-penalty CDs a good investment?
That depends. Parking your cash on the sidelines means you’re losing money—you can thank inflation for that. Stashing it in a no-penalty CD will give you a better return, though you may lose some (but not all) of your liquidity.
As any stock expert will tell you, market timing is impossible, so picking no-penalty CDs over stocks makes no sense for a time horizon of several years or more. During shorter time periods, no-penalty CDs can give you an edge. But they are no substitute for a diversified portfolio that includes bonds, exchange traded funds and “dividend king” stocks that have raised payouts to shareholders over 25 or more consecutive years.
The bottom line
CDs in general and no-penalty CDs in particular are smart places to put your money, especially if you do your homework beforehand and make a beeline straight for the highest yield. As requirements will differ between banks, even under the penalty-free banner, make sure to check the terms so you don’t run into any surprises later.
What’s more, CD rates have a good chance of rising due to a number of factors: more Fed prime rate hikes, rising bank profits and changes in Treasury yields among them.
Bear in mind also that you can also open a regular savings account at several online banks and perhaps receive just as high an APY. This might make better sense if you’ll need to tap an emergency fund at top speed.
With files from Kat Peach
Lou Carlozo is a freelance contributor to Moneywise.
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