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A certificate of deposit (CD) is a type of savings account with a fixed term and stable interest. It's a type of time deposit, meaning investors lock in their money in exchange for guaranteed rates. Higher CD rates translate to more money in your pocket when the account matures.
Last year, a string of Federal Reserve rate hikes in a high-inflation environment caused CD yields (which are closely tied to the federal funds rate) to surge. Now, as inflation has cooled, CD rates have stabilized—though rates remain relatively high. The best CDs still offer rates around 5%, a respectable return for an investment with very little risk.
If, as expected, the federal funds rate begins to decrease, CD rates will likely follow. Because CDs pay fixed returns, investors can open a long-term CD now to secure high rates.
Here's how to decide whether or not a CD is worth it, plus alternatives to consider.
Find High-Yield CDs
Pros and Cons of Investing in CDs
CDs have some benefits that make them appealing for some investors, but there are downsides too. Consider these pros and cons when deciding whether to open a CD.
Pros
- Safety: CDs are one of the safest places you can house your savings. You generally can't lose money in a CD, unless you withdraw your money early. And, a CD's interest rate is generally locked in until it matures, so you'll know in advance how much you can expect to earn.
- FDIC insurance: A CD opened at a bank insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Administration (NCUA) is insured for up to $250,000 per account holder, institution and ownership category.
- Varied options: There are many types of CDs to fit different investor needs, such as no-penalty CDs, brokered CDs and jumbo CDs.
- Laddering adds flexibility: CDs lend themselves well to creating a stream of steady income. One strategy is CD laddering, where you put money into different CDs with staggered maturity dates. Once a CD matures, you can renew it to continue earning. Or, you can withdraw your principal and earnings.
Cons
- Low liquidity: To maximize earnings from a CD, you'll need to let it mature. Taking money out before the term ends generally means forfeiting some or all of your interest to early withdrawal penalties.
- Relatively low returns: Money tied up in a CD is money you can't use to make more lucrative investments. Because a CD's interest rate is locked in, you can also miss out on opportunities to profit if interest rates rise.
- May require a minimum deposit: CDs typically require a minimum deposit, which may be $500 or more. If you don't have a chunk of change to start with, your options may be limited.
- Inflation risk: If the rate you earn on money in your CD doesn't keep pace with inflation, your savings will lose purchasing power over time.
Learn more >> Pros and Cons of Certificates of Deposit
When CDs Are Worth It
Whether or not CDs are worth it depends on current market rates and personal factors, including your savings goals and appetite for risk.
Interest Rates Are High
The earning potential of a CD is tied to market interest rates. The higher interest rates rise, the more appealing CDs become as savings options. If you believe interest rates are peaking, buying a CD can help you lock in a high rate before it drops.
You Won't Need the Money Soon
Buying a CD can help you sock away cash for an upcoming expense, such as a wedding or a down payment on a home. You'll earn a modest amount of interest on your savings.
You may also find it easier to avoid dipping funds you've earmarked for the future if you keep them in CDs, rather than in your regular savings account.
You Want a Safe Investment
Buying a CD exposes you to less financial risk than investing in the stock market. Assuming the financial institution holding the CD is FDIC- or NCUA-insured, you generally can't lose money with a CD.
However, you may lose some or all of the earned interest if you withdraw your money before the CD matures.
You Want to Diversify Your Portfolio
Purchasing a CD with a high interest rate can help diversify your investment portfolio, balancing out riskier investments such as stocks and helping you keep pace with inflation.
Learn more >> CD Rates Forecast for 2024
When CDs May Not Be Worth It
Rates Are Low
CDs can be attractive when rates peak. But in a low-rate environment, other fixed-income investments, such as bonds, may offer better returns.
You're Saving for an Emergency
CDs aren't as ideal for housing money you could need at any moment, such as an emergency fund. Even short-term CDs could be too restrictive if you need cash unexpectedly, because cashing out your CDs early means paying penalties.
You're Saving for Retirement
A retirement portfolio should balance growth and income assets to build wealth over time. More volatile assets, such as stocks, have the potential to earn much higher returns than CDs. Usually, CDs are best as a way to save toward short- or medium-term goals, such as a major purchase in a few years.
The best place to save for retirement is typically in a tax-advantaged account, such as a 401(k) or an individual retirement account (IRA). You can choose account asset allocations geared toward growing wealth or preserving money, depending on how long you have until retirement.
On the other hand, some investors use CDs as they approach and enter retirement as a way to structure a steady inflow of cash. As an example, retirement accounts generally require you to take out a yearly required minimum distribution (RMD) once you reach age 73. A CD could be a smart place to deposit your RMD and earn some interest if you don't need the money right away.
Learn more >> Should You Use CDs for Retirement Planning?
Alternatives to CDs
While CDs have some perks, they aren't the right fit for every investor. Consider these alternative ways to earn interest on your savings.
High-Yield Savings Account
With rates higher than you'll see from traditional savings accounts, high-yield savings accounts can be a good option for earning more interest without sacrificing liquidity. That can make them a good option for your emergency fund, for example.
You can find high-yield savings accounts with no fees and low or no minimum balance or minimum deposit requirements.
Money Market Account
A money market account is like a hybrid of a checking and savings account that typically offers higher interest rates than traditional savings accounts. Unlike other types of savings accounts, money market accounts let you write a limited number of checks each year. You may also be able to access your money with a debit card.
You may need to come up with a minimum deposit to open a money market account. Some accounts also require you to maintain a minimum balance to avoid fees, and allow only a certain number of withdrawals each month.
Bonds
Like CDs, bonds are a relatively safe investment with modest returns. Apart from that, the two have different features. Bonds are a type of debt security, rather than a deposit account. Bonds often have higher returns than CDs, but money you invest in bonds isn't backed by the FDIC (though U.S. government-backed bonds are equally as safe).
There are different types of bonds with different benefits to consider. For example, municipal bonds offer tax exemptions that can increase your overall returns, while Treasury Inflation-Protected Securities (TIPS), a type of U.S. Treasury bond designed to protect your savings from inflation.
How CD Returns Stack Up
Looking at APYs is a good way to ensure you're comparing apples to apples when weighing your savings or investment options.
As of August 2024, CD rates ranged from 0.23% to 1.85%, according to data from the FDIC. The best average rates were for 12-month CDs.
That said, you can find higher rates if you shop around. Certain financial institutions offer higher rates than others, and a larger deposit may correspond to a higher rate.
| CDs Compared to Other Investment Types | |||
|---|---|---|---|
| Investment Type | Initial Deposit | Rate of Return | Balance After One Year |
| 12-month CD | $10,000 | 1.85% | $10,186.58 |
| 36-month CD | $10,000 | 1.44% | $10,144.95 |
| Traditional savings account | $10,000 | 0.46% | $10,046.10 |
| Money market account | $10,000 | 0.64% | $10,064.19 |
| Corporate bonds | $10,000 | 5% | $10,511.62 |
| S&P 500 index fund | $10,000 | 10% | $11,047.13 |
Frequently Asked Questions
CD rates have decreased gradually throughout 2024 and are unlikely to go back up before the end of the year.
So far in 2024, the federal funds rate has held steady, unchanged since July 2023. But many economists predict that the Fed could cut rates before the end of the year. That said, with the best CD rates still topping around 5%, you might consider buying CDs now to lock in the best yields before rates fall.
Interest earned on CDs is taxed as regular income at your individual federal tax rate. If your tax bracket places you at a tax rate of 22%, for instance, then your CD returns would be taxed at that rate.
On the other hand, you can avoid taxes on CDs by holding CDs in a tax-advantaged retirement account. You can buy CDs in an IRA or a solo 401(k), for example. These tax-advantaged accounts have specific rules that determine how and when money from your deposits, earnings and withdrawals are taxed.
Just like other savings accounts, CDs are typically insured up to $250,000 per depositor, bank and account category by the FDIC. FDIC insurance covers both your initial deposit and any interest earned up to the coverage limit.
Make sure that you buy a CD issued by a bank backed by the FDIC. You can check whether a bank is a member of the FDIC through the FDIC's BankFind database.
If you open a CD with a credit union, your money will be insured by the NCUA, which provides the same amount of coverage as the FDIC.
The Bottom Line
While keeping some of your savings in CDs can be a good tactic, be sure you're tailoring your investing strategy to your overall goals. CDs can help you lock in yields when rates are high, and they shelter your money from the volatility of the stock market. They offer stable returns with guaranteed rates, FDIC insurance and different lengths of maturities to choose from.
That can make them a good pick for saving for upcoming purchases, but less suited to growing your money toward far-off goals, such as retirement. A financial advisor can help you balance your short- and long-term investing goals and help you choose the best financial products for your individual situation.