When putting your hard-earned money to work, certificates of deposit (CDs) are a popular option. These savings accounts typically offer higher interest rates than traditional savings and money market accounts, and can provide long-term interest earnings. However, the main downside to CDs is that they require you to lock up funds for a specific number of years, which may not be ideal for people who may need access to their money in the case of an emergency.

For these situations where you may need access to your funds and don’t want to be penalized for early withdrawals, an alternative option is a no-penalty CD, which allows you to withdraw your money before maturity without incurring a penalty. No-penalty CDs are ideal for savers who prioritize flexible liquidity alongside earning a steady interest, although this flexibility may come with slightly lower interest rates than traditional CDs.

This guide will explore how no-penalty CDs work, their benefits, and what to consider before contributing savings.

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What's a no-penalty CD?

No-penalty CDs are a type of savings account that earns interest over a defined period of time, known as a term, and allows users to withdraw funds before the maturity date without incurring a penalty. 

Unlike traditional CDs, which can charge hefty fees for withdrawing money early or loss of interest, penalty-free CDs offer more flexibility by allowing early withdrawals without losing any of the interest earned. For this reason, they’re often referred to as “liquid CDs” since the account holder can access their liquidity. No-penalty CD rates are guaranteed for the length of their term, which can come in handy if interest rates begin to decline. 

How do no-penalty CDs work?

No-penalty CDs function like traditional CDs in many regards. Both allow you to lock up funds for a specified interest rate for a predetermined term, and generally, the longer the term, the higher the interest rate. 

The main difference is that no-penalty CDs offer greater flexibility in allowing early withdrawals. Here's a breakdown of their key features:

• Term lengths: Like traditional CDs, no-penalty CDs have defined term lengths, meaning you agree to keep your money deposited for a set period. Term lengths can vary from institution to institution, but the options commonly range from a few months to a few years. The specific terms available will depend on the financial institution offering the CD. 
• Interest rates: No-penalty CDs typically offer higher rates than regular savings accounts, which is one of their main advantages. However, the interest rates on no-penalty CDs might be slightly lower than those offered on traditional CDs with the same term length — a trade-off for the added flexibility of penalty-free withdrawals. 
• Withdrawal rules: Unlike traditional CDs that impose penalties for withdrawing funds before the maturity date (often including forfeiting a portion of the earned interest), no-penalty CDs allow you to access your principal without such penalties.

No-penalty CDs are a middle ground between the higher rates offered by traditional CDs and the access to liquidity that savings accounts provide. They're ideal for individuals who want to earn more on their savings but anticipate a potential need to access those funds before the CD matures.

For both traditional and no-penalty CDs, the term ends on the predefined maturity date, at which point you’ll receive your principal contribution and all the interest earned over the course of your term. 

Can you withdraw from a no-penalty CD early?

Yes, you can withdraw before the end of your contract’s term. The process of withdrawing from a no-penalty CD can vary between financial institutions, but generally involves these steps: 

• Initiation: To start the process of withdrawing funds from a no-penalty CD, contact the bank or credit union where you opened the account. This can be done online, by phone, or in person.
• Request: Specify that you want to withdraw from your no-penalty CD.
• Verification: The institution must verify your identity to ensure you're the account holder.
• Processing: The bank or credit union will then process your withdrawal request, typically on the same day or by the next business day.

While these CDs have no penalties for early withdrawals, that doesn’t always mean there are no restrictions. Here are some common conditions: 

• Waiting period after funding: Many no-penalty CDs have a waiting period after you initially fund the CD before you can withdraw. This period might be anywhere from seven days to a few weeks. The purpose of this waiting period is to discourage very short-term use of the CD.
• Advance notice: When withdrawing from a no-penalty CD, you generally need to give your bank advance notice before taking cash.
• Complete withdrawal requirement: When an early withdrawal request is made, it's common to require the entire balance of the CD to be disbursed. Partial withdrawals are often not allowed with no-penalty CDs. 
• Account closure: In some cases, withdrawing from a no-penalty CD might automatically close the account.
• Interest accrual: You’ll receive the interest that has accrued up to the point of withdrawal.

With traditional CDs, the terms and conditions clearly state that early withdrawals will incur penalties, including paying a fee out of the interest accrued. Both traditional and no-penalty CDs may come with other associated account fees, so be sure to read the fine print carefully before making a withdrawal.

Can you withdraw interest from a no-penalty CD?

Usually. While the terms and conditions can vary between institutions, in most cases, if you withdraw early from a no-penalty CD, you’ll receive the interest already earned up to the withdrawal date. The bank will calculate the interest earned up to the day you withdraw the funds, and this amount is added to the principal when you receive your total payout.

In general, no-penalty CDs accrue interest similarly to traditional CDs. The interest rate is fixed, and interest is calculated daily based on the principal balance. The frequency of interest payments can vary, with standard options including monthly, quarterly, and at maturity.

Most institutions allow you to withdraw interest from no-penalty CDs without closing the account, but the specific terms can vary between institutions and policies.

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2 benefits of no-penalty CDs

There are two main advantages to no-penalty CDs. 

1. Easy access to funds

A primary benefit is the ability to withdraw your principal and interest before the maturity date without incurring early withdrawal penalties, which is essential when you need cash fast. Unlike traditional CDs, which may charge penalties equivalent to three to 12 months of interest, no-penalty CDs let you access your money after an initial lockout period with no financial hit, which means you get to keep more of your earned interest. 

2. Higher flexibility compared to traditional CDs

With term lengths ranging from three to 18 months, no-penalty CDs offer a shorter commitment than traditional CDs, which can lock funds for up to five years or more. This makes them ideal for savers who want higher yields than a savings account but can’t afford to tie up money long-term, offering a middle ground for financial planning.

No-penalty CDs vs. annuities

A no-penalty CD might be an excellent fit for savers looking for a higher yield than a regular savings account or product while still being able to access their funds when necessary. But before you decide, it helps to understand how CDs compare to annuities.

For savers looking for long-term options, annuities may present a better choice, allowing investors to save for retirement or secure a steady income stream. They often provide higher interest than no-penalty CDs and guarantee payouts for long periods — potentially even the rest of your life.

Like no-penalty CDs, annuities can offer more flexibility regarding payout schedules, typically allowing you to withdraw up to 10% of your account's value each year without incurring fees from the insurance company. Depending on your needs, you can withdraw funds monthly, quarterly, annually, or all at once.

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This communication / article is for informational / educational purposes only.

It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.

The Gainbridge^® digital platform provides informational and educational resources intended only for self-directed purposes.

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Amanda Gile, is an annuity specialist at Gainbridge^®

Individual licensed agents associated with Gainbridge^® are available to provide customer assistance related to the application process and provide factual information on the annuity contracts, but in keeping with the self-directed nature of the Gainbridge^® Digital Platform, the Gainbridge^® agents will not provide insurance or investment advice.

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 ^{1 Withdrawals above 10% free withdrawal amount are subject to a withdrawal charge and market value adjustment. Note: the 10% free withdrawal amount is based on initial premium for withdrawals within year 1, and anniversary value for withdrawals in year 2 and beyond. See product summary for more details at gainbridge.io/steadypace. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income.}

^{2 SteadyPace™ is issued by Gainbridge Life Insurance Company, a Delaware-domiciled insurance company with its principal office in Zionsville, Indiana. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company.}