High interest rates have made certificates of deposit (CDs) incredibly popular in recent years. In 2023, deposits to CDs more than doubled, according to financial data company Curinos. And in 2024, you can still find CDs with rates around 5% APY or higher.

However, one of the main drawbacks of a CD is that you have to keep your money on deposit for the full term. With most CDs, the bank is required to penalize you for withdrawing money before the maturity date, and there's no limit on early withdrawal penalties. Depending on the CD’s interest rate and the bank’s early withdrawal policies, you could lose a chunk of your earned interest — or even some of the principal — if you need to dip into your funds early.

However, with no-penalty CDs, that concern goes away. Unlike regular CDs, these accounts let you withdraw money before the maturity date with no penalty. There is a drawback, though: You won't earn as much interest.

How do penalty-free CDs work?

With most certificates of deposit, you deposit a lump sum at a bank or credit union, with the agreement that you won't have access to the cash for a set period — usually between six months and five years. If you take the money out early, you'll pay a fee and/or forfeit some of the interest earned. The longer the CD term, the higher the penalty may be.

But with penalty-free CDs, you can avoid that fee as long as you make your withdrawal during the penalty-free period. Depending on the account, that could be any time after you've had the account open for six days or more, or it could be at recurring intervals such as once a month or quarter.

The drawback, however, is that no-penalty CD rates are generally lower than regular CDs. Ally Bank, for example, offers an 11-month no-penalty CD with 4.00% APY. On the other hand, you’d earn 4.45% APY if you open their 12-month high-yield CD. Here's how your earnings would compare if you left your cash in each of these CDs until maturity:

Aside from lower APY and penalty-free withdrawals, no-penalty CDs are the same as traditional CDs. They're very low-risk investments, insured by the FDIC (at banks) or NCUA (at credit unions), and usually pay compound interest.

If you already have a CD and want to know if there are withdrawal penalties on your account, you can find that information in the account agreement.

Where can I find a penalty-free CD?

You'll most likely find a penalty-free CD at a credit union, but a few banks offer them, too.

Another route you can take is to open a brokered CD since these accounts don't usually have early withdrawal penalties. To open a brokered CD, you need to deposit your money through a broker rather than through a financial institution. However, the Securities and Exchange Commission warns that these accounts tend to have more complicated fee structures than other CDs and they can potentially put you at risk of being a fraud victim since some brokers are not licensed. Use caution when considering a brokered CD.

Pros and cons of a no-penalty CD

A no-penalty CD is a safe place to deposit your money for the short term and beat the low rates you get on traditional savings accounts, which currently average 0.47%, according to the FDIC. But if you don't need the money within the next year, you can earn more interest by depositing your cash elsewhere. Here's what to consider before choosing a no-penalty CD:

Are no-penalty CDs worth it?

A no-penalty CD can be worth opening if you have cash you may need to access in the short-term but you want to earn as much interest as possible on your deposit. For example, a no-penalty CD could be a good place to deposit your down payment funds when you plan to buy a home within the next year, with the option to pull out your money sooner in case you stumble on your dream home before the term is up.

Here's what to consider before deciding which no-penalty CD is right for you:

• Annual percentage yield (APY)

• Period(s) when penalty-free withdrawals are allowed

• Minimum opening deposit

• Minimum balance requirement

• Maturity date

• Membership requirements (for credit union accounts)

Alternatives to a no-penalty CD

With interest rates still hovering near record highs, there are plenty of FDIC- and NCUA-insured deposit accounts where your short-to-mid-term savings will earn solid returns. These are some of the best alternatives to consider:

High-yield savings accounts

The best high-yield savings accounts (HYSAs) pay above 5% APY but with more access to your deposits than you get from a CD. Keep in mind these accounts sometimes have minimum balance requirements, which means you can face fees for falling below a certain deposit amount. However, you can usually make up to six penalty-free withdrawals per month, while some banks don’t impose withdrawal limits at all.

Money market accounts

Money market accounts work like savings-checking hybrids, often providing debit cards and check-writing capabilities. They also offer a high level of liquidity and competitive interest rates that may even surpass those of some CDs. However, like savings accounts, money market interest rates can fluctuate, and there may be minimum balance or maximum withdrawal requirements to avoid fees.

CD laddering

If you like CDs and you're willing to put in extra work to maximize your interest, try CD laddering. With this strategy, you spread your deposits across a mix of CDs with different maturity dates. By doing so, you get access to the high APY associated with long-term CDs, but you can still use some of your funds when the short-term accounts mature.