![]() No-penalty CDs can be especially useful when interest rates are rising, because if rates jump, you have the option of pulling your money out and reinvesting into a higher-yielding product. While most CD penalties only take away interest you have already accumulated, if you withdraw from or close out a CD shortly after opening it-before the money has had time to accrue much interest-you could find that paying a penalty fee eats into your principal. For example, a short CD of six or nine months might charge a penalty of two months’ interest, while a three- or four-year CD might charge an entire year’s worth. Penalties are usually defined as a certain number of months’ worth of interest and the longer the CD term, the more months of interest you have to give up if you break the CD. In general, paying a CD penalty means sacrificing some of the interest you would have otherwise earned. ![]() ![]() (For both regular and no-penalty CDs, federal law mandates that people who close a CD within a week of opening it will have to pay a penalty of at least seven days’ worth of interest.) The difference is that anytime after the first six days of opening and funding your CD, you can pull your money out without having to pay the penalty fee that traditional CDs levy on early withdrawals. No-penalty CDs are opened and funded the same way as conventional CDs. If you are attracted by today’s high interest rates, but unsure whether to commit your money for months or years, a no-penalty CD could provide a middle option. “Or you choose a higher interest rate but risk paying a penalty.” You “accept a lower interest rate and the flexibility to get your money out early with no penalty” with a no-penalty CD, says Robert Pagliarini, president of Pacifica Wealth Advisors, an Irvine, Calif.-based wealth-management firm. No-penalty CDs do come with trade-offs, the biggest of which is often a slightly smaller yield compared to traditional CDs.
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