Savings Accounts vs. No-Penalty CDs: Which Is Better?

What Is a No-Penalty CD?

Like traditional CDs, no-penalty CDs are savings accounts that earn interest at a fixed rate for a fixed term. You make a deposit to open the CD; when the CD matures at the end of the term, you receive your initial deposit plus interest.

Traditional CDs impose a penalty for withdrawing money before maturity, but no-penalty CDs let you withdraw your principal and interest when you prefer. Typically, you must wait at least seven days after your initial deposit and withdraw the full balance in your account.

No-penalty CDs are generally a safe place to park your money. Most CDs available from banks and credit unions are insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Administration (NCUA). Unlike savings accounts, you typically can't add money to a no-penalty CD after your initial deposit.

Learn more >> What Is a No-Penalty CD?

Pros and Cons of No-Penalty CDs

Before investing in a no-penalty CD, it's important to consider the pros and cons.

Pros

• Guaranteed returns: Unlike savings accounts, which generally have variable annual percentage yields (APYs), no-penalty CDs have fixed APYs, so you can count on a guaranteed rate of return. If you expect interest rates to drop in the future, locking in a higher APY now can help you increase your returns.
• Safe investment: No-penalty CDs are typically FDIC- or NCUA-insured up to $250,000 per depositor, per account and per financial institution. Even if the bank or credit union fails, your money is protected up to these limits.
• High APYs: Most no-penalty CDs have higher interest rates than standard savings accounts. The average APY on a standard savings account was just 0.45% as of May 2024, according to FDIC data. In comparison, APYs for no-penalty CDs are as high as 5%.
• Flexibility: Standard CDs lock your money in for a set period, but no-penalty CDs offer the freedom to withdraw your money penalty-free. You usually have to wait about a week and withdraw the full balance, but you'll still be able to access your cash should you need it.

Cons:

• Minimum deposit requirements: Most CDs require a minimum initial deposit, which can range from $500 to $2,500 or more. Although some CDs can be opened with $0, you'll still need to put a minimum deposit into the account within a set period to keep it open
• Deposit limits: Unlike savings accounts, you generally can't add money to a no-penalty CD after your initial deposit. This limits your earning power.
• May not be widely available: Because fewer banks and credit unions offer no-penalty CDs, you may not have as many choices as with standard CDs or savings accounts.

What Is a Savings Account?

Savings accounts are interest-bearing deposit accounts offered by banks, credit unions and other financial institutions. Most savings accounts earn interest at a variable rate, meaning your earnings can go up or down based on benchmarks set by the federal government.

High-yield savings accounts (HYSAs) are a specific type of savings account featuring interest rates up to 10 times or more that of traditional savings accounts. You can find HYSAs with APYs of 5% or more as of this writing, many of them offered by online banks.

Like CDs, traditional and high-yield savings accounts are generally protected by FDIC or NCUA insurance, making them a secure spot for your money. Because savings accounts are designed to help you save, it's not as easy to withdraw money as it is with checking accounts. For instance, many savings accounts limit how many transactions you can conduct each month before being charged a fee. Savings accounts may charge other fees and impose minimum balance and minimum initial deposit requirements.

Learn more >> What Is a Savings Account?

Pros and Cons of Savings Accounts

Savings accounts can help you build an emergency fund or sinking fund, but be sure you understand their pros and cons.

Pros

• Easily accessible: You can take money out of your savings account whenever you want, although there may be fees if you exceed your bank's monthly limit on transactions. If your savings and checking account are at the same bank, transferring funds between the two accounts is usually fast and easy to do.
• Earn interest: The money in your savings accounts earns interest. If interest rates rise, your savings account will earn more. High-yield savings accounts can earn APYs comparable to that of no-penalty CDs, without locking in your interest rate.
• Low risk: Unlike money in the stock market, cash in your savings account is generally safe. Money in FDIC- or NCUA-insured accounts is protected up to $250,000 per account ownership category, depositor and institution.
• Low initial deposit: Plenty of savings accounts can be opened with $0, including many HYSAs. Some savings accounts require minimum initial deposits, but these can be as low as $25, making savings accounts widely accessible.

Cons

• Declining interest rates affect earnings: Your savings account earnings will suffer if interest rates go down and your account's APY drops.
• Restrictions on withdrawals: Some banks limit the number of savings account withdrawals or transfers you can make per month. Go over that amount and you might face fees or have your account closed.
• Potential fees: Unless you maintain a certain minimum balance, some savings accounts charge fees that can chip away at your savings. There could also be fees for using an out-of-network ATM or letting your account sit dormant for too long.
• Inflation risk: Even with high-yield savings accounts, inflation may exceed your account's APY, eating away at the value of your savings.

No-Penalty CDs vs. Savings Accounts

Here's a quick comparison of no-penalty CDs and savings accounts.

When to Choose a No-Penalty CD

No-penalty CDs and savings accounts each have their strengths and weaknesses. Consider a no-penalty CD if:

• You have a set amount to put in savings. Use a tax refund, work bonus or gift of money to make the relatively large initial deposit some CDs require. The more money you deposit to open a CD, the faster you'll accumulate interest.
• You don't expect to need the money soon. Sure, you can withdraw funds from a no-penalty CD early, but you'll enjoy the highest returns if you let the CD mature. CDs are best for long-term savings goals, such as a wedding or a down payment on a home.
• You want to lock in high interest rates. Are interest rates predicted to drop? Opening a CD before rates dip can provide higher returns than a savings account, without the risks of investing in securities.

When to Choose a Savings Account

You might choose a savings account if:

• You need flexible access to your funds. You never know when you'll need to use your emergency fund in a hurry. A savings account lets you withdraw or transfer money any time to quickly cover unexpected expenses.
• You want to keep adding to your savings. If you want to make ongoing contributions to your savings—such as automatically depositing part of your paycheck—you can do so with a savings account.
• You don't have a lot of money to work with. Many savings accounts can be opened with $25 or less, making them a good option if you're on a tight budget. Set aside just a little every month and watch your balance add up.

The Bottom Line

Both savings accounts and no-penalty CDs can help maximize your interest earnings while keeping your cash easily accessible. Depending on your financial goals and savings strategy, one or both types of accounts could be right for you.

Compare interest rates, fees, minimum deposits and other criteria to choose the best place for your savings. Whether you opt for a high-yield savings account or a no-penalty CD, you're taking an important step on the road to financial security.