Should I open a no-penalty CD?

Certificates of deposit are often touted as a way to earn money on your savings with virtually no risk. In terms of your principal staying intact, that’s generally true. But CDs do carry the risk of forfeiting some earnings should you cash out early. So why not invest in no-penalty CDs instead?

If you’re thinking that something that sounds too good to be true probably isn’t, you’re on the right track. No-penalty CDs aren’t a swindle, though. They’re legitimate products, offered by many reputable institutions. But though they might be smart for a particular type of saver, for most of us they leave too much money on the table.

No-penalty CDs are exactly what their name suggests: a certificate that imposes no early withdrawal penalty if you cash the CD out before its maturity date.

However, that withdrawal flexibility comes at the expense of a much lower interest rate. It’s as simple as this: If you want to maximize your earnings, you’ll need to commit to a full term, or pay the penalty if you break the contract. But if you opt to avoid penalties, the bank will pay you less interest.

The lower rate can be significant, too, to the point that you can generally find an online savings account that pays as much or more, with almost no withdrawal restrictions. So for most, it’s smarter to open a high-yield savings account if you can’t commit to a full CD term.

One scenario where a no-penalty CD can make good sense is for savers who feel they lack the discipline to keep their savings untouched. Though a no-penalty CD still allows access, it’s not as simple or quick as draining a savings account. And that added procedural obstacle might be just enough to keep them from tapping their savings.