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Because fixed-term CDs charge a fee if withdrawn early, they tend to be a good choice for long-term savings.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
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.
Is a high-yield saving account better than a CD? ›
If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.
What is the downside of a 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.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 1.81% | $181 |
| 2 years | 1.54% | $310.37 |
| 3 years | 1.41% | $428.99 |
| 4 years | 1.32% | $538.55 |
1 more rowApr 24, 2024
This CD will earn $117.15 on $500 over five years, which means your deposit will grow by 23.4%.
Do you pay taxes on a 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.
Should I move all my money to a high-yield savings account? ›
Although each financial situation is unique, it doesn't typically make sense for you to keep all of your money in a high-yield savings account.
Which bank gives 7% interest on savings accounts? ›
As of May 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Do millionaires use high-yield savings accounts? ›
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
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.
A short-term CD could yield $2,625 per year (for a 1-year CD)
| Term | APY (current | Yield on $50,000 |
|---|
| 3 months | 5.26% | $682.50 |
| 6 months | 5.00% | $1,250 |
| 9 months | 5.55% | $2,081 |
| 1 year | 4.90% | $2,625 |
Feb 10, 2024
The interest is significant and predictable
Let's say you put $10,000 into a 5-year CD with the rate discussed above – 4.75%. After the 5-year term is up you'll have earned $2,611 in interest for a total account balance of $12,611.
Should you deposit $10,000 into a CD? ›
While a short-term CD isn't going to net you a fortune, it will allow you to have your money work for you in a way it wouldn't if it were sitting in a checking account or regular savings account. If you put $10,000 into a 3-month CD with an interest rate of 5.10%, your total interest earned would be around $125.
Why should you put $5000 in a 6 month CD now? ›
While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.
How much money should I put in a CD? ›
The specific amount you put into a CD depends on your personal finances. The best way to decide how much money to put into a CD is to figure out how much cash you can afford to part with for an extended amount of time. While that amount will be different for everyone, you should keep a few things in mind.
How much will a 5000 CD make in a year? ›
How much interest would you make on a $5,000 CD? We estimate that a $5,000 CD deposit can make roughly $25 to $275 in interest after one year. In comparison, a $10,000 CD deposit makes around $50 to $550 in interest after a year, depending on the bank.
Why should you deposit $5000 into a high-yield savings account? ›
Shopping around for a top APY means you can earn 10 to 12 times more than the national average rate, which is less than half a percent. $5,000 in one of today's best high-yield savings accounts could earn as much as $136 in just six months—compared to about $11 with an average rate.
Is there anything better than a high-yield savings account? ›
CDs typically offer higher interest rates than high-yield savings accounts — but they work a bit differently.
Should I break my CD for a higher interest rate? ›
Paying an early withdrawal penalty could also make sense if your CD is earning considerably less than current interest rates. For example, if you have a long-term CD earning a 2% APY, and new CDs offer APYs in the 5% range, you should consider cashing out your long-term CD as it could mean earning 3% more on your cash.
