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No-Penalty CDs Are Far from No-Brainers

By sbup Staff

One of the major drawbacks of certificates of deposit (CDs) is that you can’t get to your money until the CD matures. So a CD that allows you to withdraw your money early, without fear of penalty, would be an easy choice, right? The problem is, deciding between a no-penalty and a conventional CD is a bit more complicated than it might seem.

Early-withdrawal fees on conventional CDs typically will cost you a few days to a few months worth of interest, depending on the term of the CD. But banks do offer no-penalty CDs -- also called liquid CDs or risk free CDs -- because customers have made it clear they want them. "Customers find no-penalty CDs an attractive product," says Doug Johnson, senior vice president with the American Bankers Association. "And many banks do it as a way to bring other business into the bank."

In fact, some banks require customers to open another account to avoid a penalty. The reason: banks need your deposit dollars. No-penalty CDs that require a second account encourage a consumer to develop a relationship with a single institution, instead of simply chasing the best CD rates from bank to bank. Even so, it pays to shop around, especially since no-penalty CDs come in all shapes and sizes.

For instance, Bank of America (Quote: BAC) offers a nine-month risk free CD with a 1.75% annual percentage yield (APY). You can withdraw the money anytime after six days, provided that the money is withdrawn into another Bank of America deposit account. Provident Bank (Quote: PBKS) offers its own type of no-penalty CD, a 14-month CD with a 1.65% APY, and doesn't charge a penalty for the first two early withdrawals -- standard penalties apply after that. Meanwhile, Virginia Commerce Bank's (Quote: VCBI) 12-month, no-penalty CD offers a 2.0% APY, but only waives the penalty on the first withdrawal. (Check out's CD section for 12-month interest rate offers.)

No-penalty CDs tend to offer lower interest rates than conventional CDs -- about 0.2 percentage points less according to Johnson. So you might be giving up some earning power for the extra flexibility. And depending on your needs, you could achieve the desired accessibility simply by laddering your conventional CDs at an appropriate interval. (For more on CD laddering, read this article.)

Best advice: Think of a no-penalty CD as another tool in your financial toolkit. It may be the right choice if the CD is structured in a way that’s useful to you -- and the interest rate fits with your banking needs. But just like any other type of deposit account, shop around for the best offer, and make sure you understand the restrictions before handing over your money.

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