A certificate of deposit (CD) is a different type of savings vehicle that locks your interest rate for a set amount of time. For example, if you open a three-year CD with 1% APY, it will keep that same interest rate for the entire three years, no matter what happens to interest rates overall.
CDs typically offer higher interest rates than high-yield savings accounts — but they work a bit differently. With CDs, you typically make one lump sum deposit, which you agree to leave untouched for the term you select. Once the term is over, you can withdraw the money and the interest you earned without penalty.
CDs offer various terms that usually range from a few months up to five years, with some even extending to 10 years. The longer the term, the higher the interest rate you'll typically earn.
Like HYSAs, most CDs are FDIC-insured up to $250,000 per account. Many CD providers have a minimum amount required to open the account, usually around $500.
There are two main types of CDs available, traditional fixed-term CDs and no-penalty CDs. Here are the differences:
Traditional fixed-term CDs
A traditional, or fixed-term, CD has the same interest rate for the entire term. If you withdraw the funds before the CD has matured, you're typically charged a penalty. The penalty amount depends on how long the CD has been open and how long the initial term is.
Because fixed-term CDs charge a fee if withdrawn early, they tend to be a good choice for long-term savings. For example, if you’re saving money for a vacation in 2022, you can choose a 12-month CD.
People who struggle with saving for goals may prefer a fixed-term CD compared to a HYSA because it’s harder to access the money.
No-penalty CDs
A no-penalty CD does not charge a penalty if you access the funds before the term is over. While this option provides added flexibility, no-penalty CDs usually offer lower interest rates than fixed-term options.
In some ways, a no-penalty CD is similar to an HYSA because there are no downsides to withdrawing the money early. However, while you won't be charged if you want or need to access your funds in a no-penalty CD, with some CDs you may not be allowed to make partial withdrawals, which means you'll have to remove all of your funds at once.
FAQs
Similar to a high-yield savings account, CDs allow you to deposit money to earn interest on your balance. Sometimes, the interest you earn on a CD can even be higher than what you earn on a high-yield savings account. But with a CD you need to keep your money locked into the account for a specified amount of time.
What is the difference between CD and high-yield savings account? ›
High-yield savings accounts vs. CDs: High-yield savings accounts, as well as basic savings accounts, generally have rates that are variable and can change at any time, while a CD locks in a rate for the term period, such as one or five years.
How much does a $10000 CD make in a year? ›
Earnings on a $10,000 CD Opened at Today's Top Rates
| Top Nationwide Rate (APY) | Balance at Maturity |
|---|
| 6 months | 5.76% | $ 10,288 |
| 1 year | 6.18% | $ 10,618 |
| 18 months | 5.80% | $ 10,887 |
| 2 year | 5.60% | $ 11,151 |
3 more rowsNov 9, 2023
Savings accounts will let you withdraw your cash at any time without penalty (although your bank may limit you to six withdrawals per month). CDs typically charge early withdrawal penalties for withdrawing money before the agreed-upon term is up.
Why would a customer want a CD rather than a savings account? ›
Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.
Is there any downside to high yield savings account? ›
Some disadvantages of a high-yield savings account include few withdrawal options, limitations on how many monthly withdrawals you can make, and no access to a branch network if you need it. But for most people, these aren't major issues.
Can I withdraw all my money from a high yield savings account? ›
Many HYSAs also have similar withdrawal limits to traditional savings accounts, traditionally six withdrawals per month. However, the Federal Reserve Board currently allows consumers to make unlimited withdrawals.
How much does a $20000 CD make in a year? ›
That said, here's how much you could expect to make by depositing $20,000 into a one-year CD now, broken down by four readily available interest rates (interest compounding annually): At 6.00%: $1,200 (for a total of $21,200 after one year) At 5.75%: $1,150 (for a total of $21,150 after one year)
Why you should put $15,000 into a 1-year CD now? ›
Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.
Do I pay taxes on CD interest? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
The short answer is yes. Like other bank accounts, CDs are federally insured at financial institutions that are members of a federal deposit insurance agency. If a member bank or credit union fails, you're guaranteed to receive your money back, up to $250,000, by the full faith and credit of the U.S. government.
Should I put all my savings in a CD? ›
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
Why is my CD losing money? ›
Inflation erodes the purchasing power of your money over time, and if your CD's interest rate isn't keeping up with inflation, you're essentially losing money. For example, if your CD earns a 2% annualized return but inflation is running at 3%, you're actually losing 1% of your purchasing power every year.
Are CDs safe if the market crashes? ›
Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
What is the biggest negative of putting your money in a CD? ›
You could get stuck with a lower interest rate than what becomes available. Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.
Should I keep money in savings or CD? ›
If you want to maximize your returns, a CD could make the most sense, as you'll lock in a high interest rate until it matures. If flexibility is what matters the most to you, a high-yield savings account offers access to your money when you need it.
What is one benefit of a CD over a high-yield savings account? ›
Also, the interest rate offered by high-yield savings accounts can change while your money is in the account but with CDs, the rate you lock in when you make a deposit stays the same throughout the entire term. This can be a good thing if you open an account before the rate drops.
What happens if you put 50000 in a high-yield savings account? ›
How much of a difference does this make? If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
Do you pay taxes on high-yield savings account? ›
The IRS treats interest earned on a savings account as earned income, meaning it can be taxed. So, if you received $125 in interest on a high-yield savings account in 2023, you're required to pay taxes on that interest when you file your federal tax return for the 2023 tax year.
