A liquid certificate of deposit (CD) allows you to access the funds in your CD without a penalty after the six-day waiting period. Liquid CDs offer a fixed interest rate and term, allowing you to have guaranteed returns without the risk of penalties. Learn how liquid CDs work and when you should consider them in your retirement plan.
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Stephen Kates, CFP®
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- Published: March 22, 2023
- Updated: October 2, 2023
- 7 min read time
- This page features 9 Cited Research Articles
- Edited By
- Liquid CDs — also known as no-penalty CDs — allow you to access the funds of your CD without facing a penalty.
- There may be restrictions on how many times you can withdraw from your liquid CD without penalties. Read the fine print to avoid accidental penalties.
- Because liquid CDs have less risk than traditional CDs, you can expect them to have lower interest rates.
What Is a Liquid CD?
A liquid CD is a type of certificate of deposit that allows you to access your money before the CD matures without facing a penalty. Similar to traditional CDs, you deposit a set amount into your liquid CD, which grows at a fixed interest rate until it matures.
While liquid CDs offer easy access, you should still wait at least six days after your deposit to access your funds, according to the Office of the Comptroller of the Currency. Even with a liquid CD, you could face a penalty if you tap into your CD within the first six days.
As long as your issuer is NCUA or FDIC insured, your liquid CD will be insured for up to $250,000. If you want a flexible and insured investment vehicle in your retirement plan, a liquid CD allows guaranteed growth with the ease of accessing your money without facing a penalty.
How Do Liquid CDs Work?
Liquid CDs minimize the risk of penalties if you need to access your funds before your CD matures. They act as an enhancement to traditional CDs by offering more liquidity.
Liquidity is the ability to convert your assets into cash or acquire cash quickly. While traditional CDs are typically locked up and remain untouched until maturity, liquid CDs allow you to move your money without risking penalties.
- Shorter Maturities
- While most CDs offer a range of maturities between six months to five years, liquid CDs are a bit more limited. When comparing popular issuing banks – such as First-Citizens Bank & Trust and Ally Bank – liquid CD terms didn’t surpass 11 months. So, if you’re looking into a liquid CD, don’t expect to invest your money for longer than a year.
- Potential Restrictions
- You should also be wary of the fine print. Some issuers place restrictions on how often you can access your money without a penalty. For example, with the California Coast Credit Union, you can only make one penalty-free withdrawal.
- Moderate Interest Rates
- Since liquid CDs offer less risk and place more power in your hands, issuers offer lower rates compared to traditional CDs. Opting for a longer liquid CD term should provide you with higher interest rates, according to the Bank of America.
How To Invest In Liquid CDs
If you’re interested in investing in liquid CDs, you should follow these four preparation steps to avoid making an investment mistake.
1. Shop around for liquid CDs with the highest rates.
Don’t just go with your first pick. Take your time to compare CD rates to get the best return. For example, both First-Citizens bank and Ally bank offer an 11-month, no-penalty CD. However, Ally bank offers 4% APY while First-Citizens offers 4.10%. Remember that liquid CDs with longer terms are likely to offer higher rates.
- 2. Verify your issuer has FDIC or NCUA insurance.
3. Read the fine print.
Confirm how many withdrawals you can make without facing a penalty, since some banks have restrictions on the number of withdrawals. For example, with MyPoint Credit Union, you can make six penalty-free withdrawals a month with their liquid CD.
4. Have a reinvestment plan for when the CD reaches maturity.
Since liquid CDs offer lower-than-average interest rates, you should have a reinvestment plan ready to go once your CD reaches maturity. This way, your retirement fund can continue to grow and combat inflation risk.
How To Withdraw From a Liquid CD
To start the withdrawal process, you’ll need to contact whoever issued your liquid CD. They can confirm whether your withdrawal will be penalty-free.
Remember that some issuers put limits on how often you can withdraw from your CD. For example, the California Coast Credit Union allows only one penalty-free withdrawal, while MyPoint Credit Union allows six penalty-free withdrawals a month.
Some issuers have rules on how much you can withdraw from your liquid CD. With Ally Bank, you can’t just take out a portion of the funds in your liquid CD — you’re required to take out the whole amount if you need to access your money early.
Your issuing bank or credit union can help walk you through the steps of withdrawal for your liquid CD.
Why Invest In Liquid CDs?
If you’re looking for a short-term CD with moderate interest rates and high liquidity, then investing in a liquid CD would likely fit your retirement investment plan. They are a FDIC- or NCUA-insured financial products with guaranteed returns, so they offer little to no risk.
Still, you should consider the pros and cons of investing in liquid CDs before securing your investment.
- Protects your principal and interest from penalty risk
- Adds liquidity and flexibility to a traditional CD
- Guarantees stable returns with a fixed interest rate
- Safe with FDIC and NCUA insurance for up to $250,000
- Offers lower interest rates compared to traditional CDs, so your investment faces inflation risk
- There could be restrictions on how often you can access your money, so you could still face a penalty if you don’t read the fine print
- Offers shorter term lengths compared to traditional CDs
Liquid CDs vs. Other Investment Option
Compare a liquid CD to other investment options, like a traditional savings account, high-yield savings account, money market account and CD ladders, to ensure you’re getting the best financial vehicle to grow your retirement savings.
The main features to compare are each investment’s liquidity and rates.
- Liquid CD vs. Traditional Savings Account
- While liquid CDs offer lower interest rates than traditional CDs, they still offer higher rates compared to traditional savings accounts. According to the FDIC, the average APY for a traditional savings account is 0.35% APY. They offer relatively the same amount of liquidity.
- Liquid CD vs. High-Yield Savings Account
- A high-yield savings account is likely to offer better rates than a liquid CD. They offer relatively the same amount of liquidity.
- Liquid CD vs. Money Market Account
- Money market accounts have better liquidity compared to a liquid CD, but their rates may be slightly lower.
- Liquid CD vs. CD Ladders
- CD ladders offer less liquidity than liquid CDs. Laddering CDs gives you periodic access to your funds as they mature, but you can’t access your money during the term like you can with a liquid CD. Since you purchase multiple CDs to ladder them, there’s more opportunity for higher rates.
Liquid CD FAQs
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9 Cited Research Articles
- Federal Deposit Insurance Corporation. (2023, February 21). National Rates and Rate Caps. Retrieved from https://www.fdic.gov/resources/bankers/national-rates/index.html
- Mengle, R. (2023, February 2). What Are the Income Tax Brackets for 2022 vs. 2023? Retrieved from https://www.kiplinger.com/taxes/tax-brackets/602222/income-tax-brackets
- Bank of America. (2023). What Is a CD and How Do They Work? Retrieved from https://bettermoneyhabits.bankofamerica.com/en/personal-banking/what-is-a-cd-investment
- Chase Bank. (2023). CD vs. Savings Account: What's the Difference? Retrieved from https://www.chase.com/personal/banking/education/budgeting-saving/cd-vs-savings-account
- Park Side Credit Union. (2022, October 17). Certificate of Deposit. Retrieved from https://www.parksidefcu.com/certificate-of-deposit/1425/
- Chin, E. (2021, October 6). Money Market vs. Certificate of Deposit (CD): Where Should I Invest? Retrieved from https://www.firstrepublic.com/insights-education/money-market-vs-certificate-of-deposit-cd-where-should-i-invest
- Office of the Comptroller of the Currency. (2021, April). What Are the Penalties for Withdrawing Money Early From a Certificate of Deposit (CD)? Retrieved from https://www.helpwithmybank.gov/help-topics/bank-accounts/certificates-of-deposit/cd-penalties.html
- Ally Bank. (n.d.). No Penalty Certificate of Deposit (CD). Retrieved from https://www.ally.com/bank/no-penalty-cd/
- MyPoint Credit Union. (n.d.). Liquid Certificate. Retrieved from https://www.mypointcu.com/liquid-certificate