It’s always a good idea to keep some extra cash in your savings. You can do this in a regular savings account, as part of your emergency fund, or in a Certificate of Deposit, also known as a CD. In general, CD rates are higher than most regular savings accounts, which makes this a good option for savings you don’t need immediately.
Find the Best Online CD Rates
Use this chart to find the best high yield CD rates. This interactive table lists some of the best CD Rates on a local, regional, and national level, including some of the best military banks, and national banks such as Chase Bank:
When to Use a CD and When to Use a Savings Account
CDs can be a good way to invest your money at higher interest rates than you may be able to find in most online savings accounts. That increased return on your deposit comes with a small price, however. Certificates of Deposit offer higher interest rates than most savings accounts because they require you to deposit your money for a fixed amount of time. You can usually withdraw the money before the CD maturity date, but you may have to forfeit a small amount of interest to access your money.
Banks offer higher rates because the guaranteed deposit timeline assures banks they can lend your money out at higher interest rates, ensuring everyone makes money on the transaction.
An online savings account is generally better if you need regular or fast access to your savings. But Certificates of Deposit work well if you don’t have an immediate need for the funds, but still want to be able to access the funds in a certain amount of time.
For example, let’s say your child will attend college in 5 years. That may not be enough time to put the money into the stock markets because there may not be time for your investments to rebound if the markets drop. Putting the money in a CD gives you less volatility, a fixed rate of return, and a timeline in which you can withdraw the funds.
College savings isn’t the only example of using a CD making sense. Many people use them for savings after entering retirement when a fixed return in the next few years is more important than the growth most people seek in the accumulation phase of their retirement savings. Other people use CDs for large expected expenses such as replacing a roof or other home repairs, replacing a car, saving for a wedding, taking a trip, etc.
One way to effectively use Certificates of Deposit is to build a CD ladder in which you open a series of CDs with various maturity dates. This gives you higher interest rates than a savings account, and you still maintain access to some of your money each year. This is commonly used by retirees who want to avoid market volatility.
How to Open a New Certificate of Deposit
Opening one of these accounts is free and easy. Simply visit one of the banks above and being the application process. You will need to provide your name, address, and additional information, then initiate a funds transfer. The account opening process should take approximately 15 minutes, and it may take 2-3 business days to transfer your funds, depending on the financial institution.
Choosing a Bank is About More than Just High CD Rates
If your only plan is to use your bank to park some cash in a certificate of deposit, then chasing interest rates may be your only consideration. But most bank customers use their bank for more than just one service.
We recommend reviewing the bank for other features, especially if you plan on using the bank for multiple accounts or services. Here are some helpful tips:
- FDIC Insurance. You should always bank with an FDIC-insured institution or NCUA insured if using a credit union.
- Don’t overlook credit unions. Many credit unions offer excellent services, including high-interest rates on savings and CDs, low fees, and other great benefits.
- Look for sign-up bonuses. Some banks offer a sign-up bonus worth several hundred dollars for a new account. This is often worth taking advantage of, even if the interest rate is slightly lower than you can find elsewhere. You can count the bonus as implied interest, often making the effective rate much higher than you can find at your current bank.
- Is this a full-service bank or savings only? Some online banks that offer high-interest rates only offer savings accounts and Certificates of Deposit. This is fine if you only want to park some cash. But some people also want a checking account. Check out this list of free online checking accounts for some great options – most of these are also paired with high-interest savings accounts, making those options an excellent choice for many customers. One of the best current offers is the Chase Bank bonus offer worth several hundred dollars.
- Does the bank offer business accounts? This only applies if you need to open a business banking account, but it is worth noting. I’m a small business owner and like to look for efficiencies in my money management. So knowing the options is helpful.
CD FAQs – What to Know Before You Buy
Before buying one or more CDs, you must understand why they might be appropriate for you. Here are some FAQs to get you started.
What is a Certificate of Deposit, and how do they work?
Certificates of deposit are time deposit accounts. They pay a fixed interest rate on the money you invest for a fixed period.
Unlike a savings account, CDs generally don’t allow you to withdraw the principal at any time during the term unless you’re willing to pay an early withdrawal penalty.
Because CDs lock up your money for a set period, banks or credit unions pay a higher interest rate than bank savings accounts. Typically, the longer the term, the higher the interest rate.
How do I choose a CD?
Banks and credit unions offer CDs in various terms and types. While Annual Percentage Yield (APY) is a primary factor when shopping for a CD, there are others to consider.
Compounding schedule. Look for a CD that compounds daily. The faster your interest compounds, the more money you earn.
Minimum deposit. Requirements for minimum deposits vary by bank and credit union.
Term. Your time horizon is a significant factor, and you should align the CD’s term with when you’ll need access to your money.
Early withdrawal penalty. Penalties vary by institution and term, but they can be costly by taking back some of your earned interest and some of your principal investment.
Customer experience. The institution’s customer service department should be easy to reach, helpful, and responsive.
Safety. Look for the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) to insure your account at a bank. In the event of a bank failure, it protects up to $250,000 per depositor, per bank, for each account ownership category.
What Is a CD Ladder?
With a CD ladder strategy, savers spread their money across different CDs with varying terms. A portion of the money goes toward short-term CDs, while another part is allocated to longer-term CDs.
Longer-term CDs tend to pay higher yields but require you to lock up your money for an extended period unless you’re willing to pay an early withdrawal penalty.
How does the Federal Reserve impact CD rates?
When the Federal Reserve raises or lowers the federal funds rate, banks typically respond by moving savings and money market account yields in the same direction. CDs tend to track Treasurys closely.
For example, two emergency Fed rate cuts and decreasing Treasury rates in 2020 caused high-yield CDs to decrease.
Last year, the U.S. central bank raised rates three times — in March, May, and June — to rein in inflation. Even before the Fed’s first move in March, some banks that pay competitive yields began offering higher APYs on CDs.
What are other reasons CD rates rise?
CD interest rates are influenced by various factors, including the yields on Treasurys, competition among banks, and the ability to lend money at a higher rate.
When the federal funds rate goes up, deposit rates follow suit. However, many other factors can also influence CD rates, so it’s essential to keep an eye on the overall economic environment and how market conditions may affect your particular financial institution.
What about CDs and taxes?
Traditional IRAs are tax-deferred accounts. You’ll pay taxes on the interest earned from a CD that contains non-qualified money.
If the money is in a traditional IRA certificate, you won’t have to pay income taxes until you withdraw the money.
In some cases, you can deduct your CD contributions from your taxes. For example, if you can contribute to a traditional IRA certificate, you may get a full or partial deduction.
Your income, marital status, and whether a retirement plan at work covers you are some things that will determine if you can get an IRA deduction.
When in doubt, consult your tax professional for advice that applies to your situation.
How many CDs can I have at one time?
There’s no limit to the number of CDs you can own. But you should consider a few things if you want to own several.
Each CD has its interest rate and term length, so you’ll need to decide which account offers the best return for your needs.
Some banks may charge fees for multiple CDs. Check with your financial institution before opening multiple accounts.
You’ll be locked into the interest rate and term length of each CD, so make sure you won’t need access to that money before the account matures.
What’s the difference between a bank CD and a credit union CD?
Credit union CD accounts typically offer higher rates of return than bank CD accounts because they’re not subject to the same fees and regulations as commercial banks. Credit unions also typically offer more flexible terms and conditions, including the ability to withdraw funds early in certain circumstances.
Consider Opening More Than One CD if You Have a Large Amount of Savings
Many people prefer to open several Certificates of Deposit since they lock up their savings for a fixed amount of time. This gives you access to your funds on a rotating basis, making it easier to withdraw a small amount of money instead of closing out the entire CD.
The FDIC (Federal Deposit Insurance Corporation) insures your savings against bank failure, up to $250,000 per account. So your money is safe.
Find online savings account interest rates. Use this link to find the best interest rates for online savings accounts in the US.