Are CDs Liquid?

Are CDs Liquid?

Traditional CDs aren't liquid. Unlike traditional savings or money market accounts, CDs don't allow you to deposit and withdraw money as needed. With a CD, you agree to leave your money in the account for a specific amount of time, known as the term, while it earns a fixed amount of interest. At the end of the term, you can withdraw your original deposit plus the interest it earned or roll over your balance into a new CD.

Terms vary by institution, with the most common ranging from three months to five years. In exchange for not accessing your money during the term, CDs offer higher interest rates than traditional savings accounts. However, you'll pay a penalty that could erase any gains you earn if you withdraw your funds before the end of the term.

What Is a Liquid CD?

Some financial institutions offer liquid or no-penalty CDs, which work like their traditional counterparts, with one exception: You can withdraw money from the account before the maturity date without paying a penalty.

You often need to let your bank or credit union know in advance if you want to withdraw your money before the end of the term. It may take a week or longer to process your request.

Depending on your financial institution, you may be required to withdraw the entire balance or you might be able to make a partial withdrawal.

While liquid CDs are a safer bet than traditional CDs if you don't know when you'll need to access your cash, you'll trade flexibility for potential earnings. Liquid CDs usually have lower interest rates than traditional ones and may have higher minimum deposit requirements.

How Soon Can You Withdraw Funds From a Liquid CD?

Under federal law, you must leave your money in the account for at least six days after opening it to avoid paying a penalty. However, your financial institution may have different rules that require you to wait longer. Check the terms and conditions of your account for more information.

Pros and Cons of Liquid CDs

Liquid CDs have many of the same benefits and risks as traditional CDs.

Alternatives to Liquid CDs

A CD is a safe place to park your cash until you're ready to spend it, but it may not be your best option. Here are some alternatives to consider.

• Traditional CDs: You'll probably earn more with a traditional CD if you can commit to leaving your funds untouched until it matures. If not, you'll pay a penalty to withdraw your money early. A traditional CD may be a good option if you're setting aside money for a specific reason and can choose a term that aligns with your timeframe for accessing it.
• High-yield savings accounts (HYSA): Using an HYSA can help you snag a higher interest rate than a traditional savings account without sacrificing access to your cash. Because you can withdraw money as needed, HYSAs can be a good option for your emergency fund since you never know when an emergency will pop up. Since rates can vary significantly, it's worth comparing multiple options if you're looking to maximize your earnings.
• Money market accounts: Money market accounts have features of both savings and checking accounts, making them a good option if you're looking for a higher interest rate but want to retain the ability to use the account to pay some of your bills. Because money market accounts often limit certain types of transfers and withdrawals, they shouldn't replace a traditional checking account.
• Treasury bills (T-bills): T-bills are government-issued bonds sold in increments of $100 and available in terms ranging from four to 52 weeks. You buy T-bills at a discount, and at the end of the term receive the face value of the bill. The difference between what you pay and the face value is the "interest" you earn.

The Bottom Line

Traditional CDs aren't considered a liquid asset, but no-penalty CDs are. Both types of CDs work similarly and have many of the same benefits and risks. Because CDs generally provide higher interest rates than traditional savings accounts, they can be a good option when you need a place to keep your cash safe.

If you know when you'll need to withdraw your funds, the higher interest rate on a traditional CD may be worth it because you can choose a term that aligns with your timeline for accessing your cash. If not, a liquid CD is a safer bet.

However, CDs aren't your only savings option. High-yield savings accounts also offer higher interest rates without limiting your ability to make deposits and withdrawals. Considering how and when you plan to use the funds can help you choose the best account type for your needs.