Liquid Certificate of Deposit (CD)

What Is a Liquid Certificate of Deposit (CD)?

A liquid certificate of deposit is a type of CD that allows you to make withdrawals without incurring a penalty. The funds in the account are accessible throughout the lifetime of the product, unlike most traditional CDs, which apply a hefty penalty fee for withdrawing early, reducing the interest earned to that point. However, investors can’t have their cake and eat it too. Liquid CDs generally offer lower rates than traditional CDs, meaning they sacrifice yield for flexibility.

Understanding a Liquid CD

Liquid CDs allow you to make a withdrawal before the maturity date but not without providing the institution with advanced notice. It’s not as simple as making a withdrawal from a checking account.

Some banks or credit unions require a week’s notice, while others need as much as 30 days. In many cases there is also an initial lock-up period: You can’t make a withdrawal in the first week of the fund. That prevents the kind of day-trading behavior often prevalent in the stock market. Furthermore, liquid CDs frequently have limits on the amount that can be withdrawn at a given point in time. Some banks permit 100% of the funds to be withdrawn in one transaction, while others have more stringent requirements, with the withdrawal amount being either a minimum percentage of the initial deposit or simply a minimum dollar amount.

Penalty-free withdrawals marketed by liquid CDs can also be a ruse to draw in investors. Liquid CDs often restrict the number of penalty-free withdrawals, for example. They also have higher minimum investment amounts that do not provide the same yields when compared to other, relatively less liquid instruments.

Breaking these rules can result in withdrawal penalties comparable to a traditional CD. If you are interested in a liquid CD, you should remember to read all the terms and conditions of the product, which plainly state the different withdrawal requirements and minimum account size.

Withdrawals from liquid CDs can be contractually limited, as can the amounts of those withdrawals.

Alternatives to a Liquid CD

Some investors enjoy the flexibility of a liquid CD. It provides quick and easy access to interest-bearing funds in the event of an emergency. That way you don’t necessarily need a huge cushion of idle cash sitting in a savings account.

Liquid CDs aren’t for everyone, though. There are plenty of other solutions that satisfy various financial goals. One option is to purchase a traditional CD that offers better returns but less flexibility. If you have a solid emergency fund and no need to access quick cash, you will benefit more from a traditional CD.

Laddering is a popular approach for investing in CDs that promises consistent income at regular intervals. Another approach is to open a money market account, which provides more flexibility than a CD.

Examples of Liquid CDs

A bank offers liquid CDs with interest rates ranging from 2% to 5% over time periods that range from one year (for 2% returns) to five years (for 5% returns). The minimum investment amount for these CDs differs based on interest rates.

Liquid CDs with 2% interest rates, for example, require a minimum investment amount of $10,000, while those that offer 5% returns require a minimum investment of $25,000. Penalty-free withdrawals for CDs that offer 2% are restricted to one withdrawal, while restrictions for those with 5% returns are limited to three withdrawals during the entire term period.