Here's What Happens When You Put Your Emergency Fund in a No-Penalty CD

Opening a certificate of deposit (CD) makes it possible to lock-in today's unbelievably high CD rates. But for those who have only emergency savings, this "lock-in" feature could pose a big problem. Depositing your money in a CD typically means you can't access it freely -- at least not without paying a penalty. It can be great if you don't touch your money, but heartbreaking if you must forfeit hard-earned interest to break your contract.

But for those who have only emergency savings, another kind of CD may be a viable option -- no-penalty CDs. These CDs allow you to lock-in today's high interest rates without penalizing you for early withdrawals. If you want the benefits of a CD without its restrictions, let's take a look at no-penalty CDs and see if it's worth it for your emergency fund.

No-penalty CDs let you break your contract but still come with some rules

Unlike traditional CDs, no-penalty CDs let you make early withdrawals without forfeiting interest. Typically, your bank or CD provider will only lock your money up for a short period, like seven to 30 days, after which you get penalty-free access to your money.

In exchange for the no-penalty withdrawals, these CDs offer lower APYs than those that impose a penalty. But with today's highest CD rates, you could potentially lock in an APY between 4.5% and 4.85%, which is still fairly high for a savings product. A few banks that provide no-penalty CDs include:

• Marcus by Goldman Sachs
• Ally
• Synchrony Bank

Some of those providers may require account minimums, but it's usually a relatively low amount, like $500.

One potential drawback to no-penalty CDs is that they don't usually offer partial withdrawals, meaning you might have to liquidate your entire CD and terminate your contract to access funds, even if an emergency only calls for a small portion of your savings.

Is a no-penalty CD better than a high-yield savings account for your emergency fund?

In terms of security, high-yield savings accounts and no-penalty CDs have near equal weight. The only difference is that high-yield savings accounts let you withdraw money immediately after opening your account, whereas no-penalty CDs typically make you wait a short period, like seven days, before the no-penalty period begins.

Savings accounts, however, have some other advantages. They allow you to make partial withdrawals, as well as deposit money into your account at any time. CDs typically don't allow you to continue depositing money, or, if they do, there might be a limit on how many deposits you can make. Some high-yield savings accounts also have debit or ATM cards that let you withdraw cash. In contrast, with no-penalty CDs, you have to transfer money into an external account first, which could take a few business days.

But no-penalty CDs have some muscle of their own. You can lock-in today's high APYs for as long as your term allows, regardless of how interest rates swing. And many no-penalty CDs have higher interest rates than those offered on high-yield savings accounts, giving your emergency savings an extra boost.

Either way, when you put your emergency fund in a no-penalty CD or high-yield savings account, you have flexible access to your money. This makes both a better option for your emergency savings than traditional CDs, which may penalize you for making early withdrawals. I'd consider both options carefully -- and read the CD's terms -- but if the no-penalty CD has a higher APY than a savings account, it could be more beneficial to put your emergency savings there.