Another Benefit of No Penalty CDs Quickly Comes to the Fore

Six months ago, I wrote on BestCashCow about the benefits and disadvantages of No Penalty CDs. At the time, my analysis focused heavily on the opportunity to gain a small amount of yield over savings accounts with no risk and very little inconvenience. So long as you do not need to access you cash for 10 days, the two main drawbacks are that you ordinarily need to close (and reopen) the entire product in order to make even a small withdrawal and you need to monitor rates in a rising rate environment to be sure that you are still earning a competitive rate (BestCashCow makes monitoring rates easy here).

My article was based on the assumption that savings rates would continue to rise in the manner in which the Federal Reserve was guiding at the time and that we would see savings rates over 3% in 2019. Since then, the Federal Reserve has lost its independence from the Executive branch and its most recent guidance indicates that it isn’t going to be raising the Fed funds rate in 2019. CD rates had already begun coming down before the President (directly and through Stephen Moore) and Larry Kudlow launched an attack last week on Jerome Powell, demanding an immediate 50 basis points reduction in the Fed Funds rate in order to combat an inverted yield curve.

It is now highly unlikely that savings rates are going to be increasing as we go through 2019, and it is very possible that they could fall from here. That makes any opportunity to earn a premium over your current savings rate very attractive, and it also makes it attractive to lock in such a rate for around a year. But, you should be hesitant to go out much longer than a year as there is not much of a premium in longer term CDs at the moment and the Fed is still guiding towards a Fed Funds raise in 2020).

As of this writing, you can still find a one-year CD that yield 2.80% or more. You can find those rates online. You can also find them at banks near you and credit unions near you.

In an environment where rates are not going up and where there is a still premium in one-year CDs, the main reason that people resist one-year CDs is the early withdrawal penalties. Most online banks charge a penalty of at least 3 months interest should you require your cash before maturity, and this penalty can invade principal. Some banks and credit union charge more than others for early withdrawal.

No Penalty CDs do not bear the risk of an early withdrawal penalty and enable you to lock in a rate for about a year.

As of this writing there are three interesting No Penalty CDs being offered by major online banks. Purepoint is offering 2.60% on their 13-month, Marcus is offer 2.35% on their 13-month and Ally is offering 2.30% on their 11-month. At each of these banks, these rates not only represent a premium over the comparable online savings rate, but also prevent your rate from falling. You, however, may still find higher online savings rates from other banks, but you’ll bear the risk of falling rates during this year in which the direction and independence of the Federal Reserve has become less certain.

You can always check No Penalty CD rates along with other special term CD rates here.

Editor's Note: On April 9, 2019, Purepoint lowered their 13-Month No Penalty CD rate from 2.60% to 2.50%.