No-Penalty CD – How Does It Work?

More banks offer no-penalty CDs now. Here's what you need to know: how to compare no-penalty CDs, what happens if you withdraw early from most CDs, when to break a CD, what to use no-penalty CDs for.
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Managing Editor
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No-penalty CDs offer a distinct advantage: higher CD rates without the long-term commitment.

Putting your money in a certificate of deposit usually involves a trade-off: the longer you commit your funds, the higher the interest rate a bank is willing to offer.

But a growing number of banks are offering no-penalty CDs – breakable CDs that effectively give you the best of both worlds (higher CD rates without the long-term commitment).

If you are considering investing in a CD, you should learn about no-penalty CDs before you commit your money.

What Is a No-Penalty CD?

A no-penalty CD is like a regular CD, offering high interest rates in exchange for your commitment to leave your money on deposit for a specific period of time – except that it doesn’t penalize you if you need to break your commitment and pull money out early.

This can give consumers a big advantage, because early withdrawal penalties can be expensive.

What Happens If You Withdraw Early?

Most certificates of deposit are issued for a specific term, or period of time, that ranges from a few months to five years. If you sign up for a one-year CD, for example, you are expected to keep your money on deposit in that CD for the entire year or else pay an early withdrawal penalty.

The average penalty on a 1-year CD research found that the average penalty on a 1-year CD is 142 days’ worth of interest. (That would be nearly five months of interest down the drain.)

With a $10,000 balance, you would earn $111.35 in interest over the 1-year term. But the average penalty for breaking a 1-year CD would cost you $65.09 – or more than half your interest.

The average penalty on a 5-year CD

On 5-year CDs, the penalties are even harsher. The average penalty is 333 days’ worth of interest, so you would lose about 11 months’ worth of earnings.

The penalties tend to be even steeper for high-yielding CDs; so on average, breaking into a 5-year CD early could cost you more than a year’s worth of interest. The average 5-year CD with a $10,000 balance would pay $155.72 in annual interest, and the average early withdrawal penalty would set you back $167.64.

With a no-penalty CD though, you are allowed access to your money before the term is up without paying the penalty. As the above figures show, this lack of a penalty can really help.

Which Banks Have the Best CD Rates?

Hundreds of banks offer CDs, and there’s fierce competition among them to offer the best rates. Use our CD rate-finder below to sort through the list to find a CD that fits your financial goals.

No-Penalty CD Terms

Bank CD Name CD Term (in months) Traditional / Online
Marcus by Goldman Sachs No Penalty CD 7 Online
Ally Bank No Penalty CD 11 Online
CIT Bank No Penalty CD 11 Online
Marcus by Goldman Sachs No Penalty CD 11 Online
Citibank No Penalty CD 12 Traditional
S and T Bank Penalty Free CD 12 Traditional
Marcus by Goldman Sachs No Penalty CD 13 Online
Old Line Bank No Penalty CD 13 Traditional
Ridgewood Bank Penalty Free CD 15 Traditional

[Note: This study was completed on July 17, 2019. Product terms may have changed. Please visit each bank’s website for current information.]

How to Compare No-Penalty CDs

As you can see from the table above, no-penalty CDs come in a variety of lengths. Rates change frequently too. So how do you compare them with each other, and with the alternative of a CD that does have an early withdrawal penalty?

There are two characteristics that are generally true of these no-penalty CDs:

  1. They generally have fairly short found that the longest term of a no-penalty CD was a 15-month CD, and most of the terms are around a year. This means that no-penalty CDs are not really an alternative to long-term CDs, but can be thought of best as alternatives to CDs in the 6-months-to-1-year range.
  2. No-penalty CDs often have irregular time periods, such as 7, 11 or 13 months.This may seem to make them harder to compare to the standard CD lengths of 3 months, 6 months or a year until you remember that you can break into no-penalty CDs at any time. That means you can compare them to any CD of similar length or shorter.

Lean toward long-term, no-penalty CDs

Because of these characteristics, when you look at no-penalty CDs, you should lean toward a CD with the longest term you can find. That is because they are likely to pay the highest interest rates; and if you can break into the CD at any time without penalty, there is no harm in choosing a longer term.

>> Calculator: Know your CD’s inflation-adjusted value at maturity

Comparing no-penalty CDs with conventional CDs

  1. Consider yieldSuppose you were thinking of a 1-year CD. There would be no reason not to consider the 13- and 15-month products listed in the table if they offer the best yields, because you can always shorten the term to suit your needs without penalty.

    So if a no-penalty CD offers a better yield than a conventional CD you were considering, you could choose the no-penalty CD even if it were for a longer time period than you had in mind.

  2. Consider how likely you are to break into a conventional CDBut how do you weigh the two options if a CD with a penalty has a higher yield than a no-penalty CD?

    In that case, you have to consider how big a chance there is that you would break into the CD early. The earlier you might do that, the greater the advantage of a no-penalty CD.

What Happens If You Withdraw Early: Penalty vs. No-Penalty CDs

The chart below shows two high-yielding CDs of approximately one year in length. The Sallie Mae CD has a higher yield but an early withdrawal penalty, while the Marcus by Goldman Sachs CD has no penalty.

The table shows how much interest you would earn net of the early withdrawal penalty if you took out your money in less than one year and if you kept it in for the full year:


As you can see, despite a slightly lower yield, the Marcus by Goldman Sachs CD has an advantage if you take your money out in less than a year. Only by keeping your money in for the full term and avoiding a penalty could you reap the full advantage of the higher yield on the Sallie Mae CD.

Therefore, this kind of choice comes down to how certain you are that you will be able to leave your money in the CD for the full term. The more you think you might have to take the money out earlier, the better a no-penalty CD would look.

Why Would You Break a CD?

Under what circumstances would you break a CD by withdrawing money early?

Two situations force the decision to break a CD:

  • You need money immediately
  • You can get a better interest rate

In terms of a need for money, some needs are predictable and some are unpredictable. Both might cause you to break a CD early.

Predictable needs

Starting with a predictable need, let’s say you know you will need money for a down payment on a home in six months. You could still consider a longer term CD if:

  • The extra interest you would earn in six months exceeds the penalty you would pay for breaking the CD, or
  • The CD had no early withdrawal penalty

In those cases, a predictable need could cause you to plan on breaking a CD early.

Unpredictable needs

Of course, many financial needs are unpredictable. Therefore, when you commit to a CD, you have to consider how big a chance there is you would have to break into the CD early and how big a penalty you would pay if you do.

If there is a low chance of an unexpected financial need arising, you can confidently commit to a longer term. Also, if the certificate of deposit has no early withdrawal penalty, there is no downside to breaking it early if you have to.

That just leaves the other type of situation when you might break a CD – for example, when you have been shopping for CD rates and you know there’s a better rate elsewhere.

When to Break a CD for Higher Rates

Suppose you committed to a one-year CD and, in three months, you find CD rates have risen. What do you do?

If you have a no-penalty CD, the answer is easy. You can simply break your current CD and sign up for a higher yielding CD.

If interest rates rise and you have a CD with an early withdrawal penalty, the answer is more complicated:

  • You have to calculate how much extra interest you could earn in a higher yielding CD over the remaining term of your current CD, and then compare that to the penalty you would pay if you broke into your CD early.

Only in periods of sharply rising interest rates is it likely to make sense to break a CD with a penalty in order to switch to a higher yielding CD. However, a no-penalty CD gives you the option of making that switch even for more normal interest-rate increases.

With no-penalty CDs, it is still important to make sure they offer a fairly competitive interest rate. If that is the case, then the flexibility they give you in case of unexpected needs or rising interest rates give them a special advantage over conventional CDs.

What are No-Penalty CDs Best For?

Here are some examples of good uses for a no-penalty CD:

1. Emergency funds

By nature, emergency funds are designed to cover unexpected expenses. Normally, the drawback of using a CD in an emergency fund would be the early withdrawal penalty. However, a no-penalty CD removes that concern.

2. Expenses with uncertain timing

Suppose you are shopping for a house. You could put your down payment money in a no-penalty CD even before you know when it will be needed, since there is no cost to accessing the money at any time.

3. Rising interest-rate environments

A risk of locking up money in a CD is that you could potentially miss out on a higher return if interest rates rise during the term of the CD. With a no-penalty CD, you could take your money out at any time and reinvest it in a higher yielding CD if rates rise during the CD’s term.

These are just some examples of the best uses for a no-penalty CD. Generally, any situation where you might need immediate liquidity but want a higher yield than a savings or money market account would be a good fit for a no-penalty CD.

Frequently Asked Questions

Q: How do I know when it’s worth paying the penalty to cash in a CD early so I can start a new one at higher rates?

A: The simple answer is that it is worthwhile when the penalty you would pay is worth less than the extra interest you would earn by switching to a CD at more current rates. However, behind that simple comparison are several dimensions:

  1. How big a penalty do you face? The starting point is to look at your current CD term to see how big a penalty you are in for. Keep in mind that some penalties decline later in the CD’s term, so make sure you find out the penalty applicable to the amount of time your CD has left.
  2. How far have rates come? Thus far, while some types of interest rates have started to rise, CD rates have yet to move. Keep an eye on the market so you’ll know when the rise in rates starts to influence the CD market.
  3. How long do you have to go on your CD? If you face a penalty of 10 basis points, you don’t necessarily need that big a rise in rates to make it worth switching. For example, if rates rise by 5 basis points and you have four years left on your CD, you would gain a total of 20 basis points by switching, or twice as much as the penalty you face.
  4. How far do you think rates will go — and how fast? If you think rates will continue to rise swiftly, you may want to wait even once you could benefit by switching.
  5. How far are the best CD rates ahead of average rates? As a practical matter, you shouldn’t be concerned with the average change in CD rates. You’ll want to shop for the best CD rates, and make your decision based on how much you could gain by switching from your current CD to one of today’s best CD rates.

If you get the opportunity to benefit from making this kind of move, take a lesson from this situation and make the early-withdrawal penalty one of the terms you look at when choosing a new CD. After all, just as interest rates fell for a long time, they may now experience an extended rise. This may not be the last time you’ll want to break into a CD early to switch to more up-to-date rates.

Q: I’m thinking of moving money from an IRA savings account to CDs at another financial institution. I’m 60 years old — will I be penalized for making this change?

A: Being 60 years old means you are no longer subject to the tax penalty on early IRA distributions. However, there is still a question of why you would want to give up the other tax advantages of having an IRA, especially since you should be able to make this kind of switch without giving up those advantages.

The IRS imposes a 10% tax penalty on distributions from an IRA if the owner of that IRA is younger than 59 1/2, so you are in the clear on that score. Remember though, as money comes out of an IRA, you are subject to ordinary taxes due on that money. In the case of a traditional IRA, the entire amount you withdraw is taxed as income, unless some of the contributions to that IRA were made with after-tax money. In the case of a Roth IRA, the amount of your contributions should not be taxable when withdrawn, but the earnings they produce are.

The point is, when you withdraw money from an IRA, some or all of that money may be subject to ordinary taxes, as will any subsequent earnings on the proceeds. The question in your case is: Why would you pay those taxes before you are ready to use the money? You are certainly not required to take money out of the IRA at this point — the requirement for mandatory distributions starts at age 70 1/2 for traditional IRAs, and there is no such requirement for Roth IRAs.

You are allowed to roll money over from an IRA at one institution to an IRA at another institution with no tax penalty. You are also allowed to hold CDs within an IRA. So, why not simply start an IRA account at the new institution, and invest the money in CDs? Just make sure your old institution is notified in writing that this is a transfer to a new IRA, so the transaction will be recorded as a rollover rather than a distribution. Also, be sure to specify to the new institution whether you want a traditional or Roth IRA — most likely, you will want to convert to the same type of IRA you had at your old institution.

Finally, before you commit to a new institution, be sure to shop for the best CD rates. If this money is going to remain in your IRA for a while, you will want it earning the best CD rates you can find until you are ready to start taking distributions.

Q: Can I transfer money from an IRA to a CD at the same bank without penalty?

A: Tread carefully. Transferring money out of an individual retirement account (IRA) can have severe tax consequences.


Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).