High-Yield Savings Accounts vs No-Penalty CDs: Which is the Best Fit for You?

A couple discussing their finances at a desk.

(Image credit: Getty Images)

Choosing the right savings account can be the difference between maximizing your potential and missing out on hundreds of dollars in earned interest. That's why once a year, I'll shop around to ensure my savings account continues to meet my needs, and there isn't one that might be better suited for my situation.

Now is an important time for savers to shop around. The Federal Reserve cut rates twice, and it may cut them again when it meets in December. As such, choosing the right account can help you stay on course for achieving your savings goals even with diminishing returns.

With this in mind, two options to consider have some commonalities. I'll compare how high-yield savings accounts and no-penalty CDs are similar, highlight the difference between the two and which one works best for your savings goals.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

How does a no-penalty CD work?

Normally, when you open a CD, you pledge to keep the money in the account for a specified time period. But what happens if you need your money before the term matures? You could be on the hook for months of earned interest, depending on your CD term.

If you're worried about tying up your cash, one solution is a no-penalty CD. A no-penalty CD comes with terms ranging from six months to a year. However, unlike a regular CD, with a no-penalty CD, you can withdraw money once you reach the initial vesting period — normally, one week to a month.

Most importantly, no-penalty CDs come with a fixed interest rate, and many banks offer FDIC insurance to protect your investment further. If the Fed continues cutting rates, it won't impact you. The rate you lock in now is the rate you'll receive through your term.

Use the tool below to shop and compare CD rates quickly, powered by Bankrate:

Is a no-penalty CD a smart move for you?

A happy dude excited by something he read on his phone

I generally recommend no-penalty CDs to savers who already feel confident in their emergency fund. A standard emergency fund typically covers three to six months of expenses, but aiming for closer to a year gives you more breathing room if a job loss or unexpected setback occurs.

The reason comes down to maximizing your earnings. When you open a no-penalty CD, you lock in a fixed interest rate for the full term. However, if you end up withdrawing the money soon after opening the account, the CD will close, and those funds are no longer earning that fixed rate.

If the Fed cuts rates again and you move that money back into a high-yield savings account, you may end up with a lower APY than what you originally locked in. In that case, you miss out on the long-term benefit of securing a higher rate today.

Another thing to keep in mind about no-penalty CDs is that each bank treats them differently. Some will allow you to withdraw the entire amount once you reach your vesting period, while others permit one withdrawal per month. Therefore, they work best for established savers who want to grow some of their earnings with minimal risk.

Do you want an account recommendation? Climate First Bank offers a six-month no-penalty CD earning 4.34% APY.

Are high-yield savings accounts still a wise option?

I believe they are. I've been reviewing rates weekly on all savings accounts and have been surprised to find that some of the top accounts haven't issued rate drops. To demonstrate, Newtek Bank offers a high-yield account with a 4.35% APY. This rate has remained the same for the past few months, allowing savers to capitalize on higher returns for longer than other banks.

HYSAs are excellent savings vehicles for savers with short-term goals (think three months or less). If you're looking to earn some money for a few months to fund a project or a vacation, they're a great option to consider.

Many online banks offer them with no account fees or minimums and FDIC Insurance, making this an exceptional choice for short-term saving goals or for those looking to grow their emergency fund.

You can quickly compare some of today's best savings offers using this Bankrate tool:

Of course, there's something you must consider with high-yield savings accounts: They come with variable interest rates.

It means that if the Fed cuts rates again, your APY will dip. However, given that it takes some banks months to respond to Fed policy, you can still maximize higher rates if you act quickly.

Here's a breakdown of different scenarios and which of these two accounts works best in each:

Swipe to scroll horizontally

Which account is right for me?
Row 0 - Cell 0	Scenario	Account	Row 0 - Cell 3
Row 1 - Cell 0	Buying a laptop in three months	High-yield savings	Row 1 - Cell 3
Row 2 - Cell 0	Saving for a trip in one year	No-penalty CD	Row 2 - Cell 3
Row 3 - Cell 0	Building your emergency fund	High-yield savings	Row 3 - Cell 3
Row 4 - Cell 0	Spring home project	No-penalty CD	Row 4 - Cell 3
Row 5 - Cell 0	You're worried rates will drop more	No-penalty CD	Row 5 - Cell 3
Row 6 - Cell 0	Looking to park $5,000 and have an emergency savings established	No-penalty CD	Row 6 - Cell 3
Row 7 - Cell 0	Want access to your cash anytime	High-yield savings	Row 7 - Cell 3

The bottom line on high-yield savings vs no-penalty CD

For savers with shorter-term goals or needing to build an emergency fund, a high-yield savings account remains a wise option, as you'll earn an APY that outpaces inflation. You can also use them for any funds that require immediate liquidity.

Meanwhile, if you're an established saver who's looking for a slightly longer-term option, a no-penalty CD works the best. It offers a fixed interest rate, allowing you to lock in a rate now before the Fed cuts diminish it further.

Sean is a veteran personal finance writer, with over 10 years of experience. He's written finance guides on insurance, savings, travel and more for CNET, Bankrate and GOBankingRates.