Is it better to put your money in a CD or savings account?
Savings accounts give you more flexibility to make withdrawals, but CDs offer fixed interest rates that can boost some savings if you're able to leave your money alone for a set time. The best place to deposit your cash generally depends on how long you're willing to leave it in your account.
Penalties. This is the main disadvantage when it comes to CDs. If you need to withdraw the funds before the CD matures, you have to pay an early withdrawal penalty. The size of the penalty can vary depending on your bank, the CD term and the yield.
In sum, CDs will likely earn more interest than savings accounts. That doesn't mean CDs are the right place for your $5,000, but if earning the most interest is important to you, CDs are a compelling choice.
One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal. “During times of uncertainty, liquidity is often paramount.
Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.
Disadvantages of a CD Account
And unlike a savings account, you may not have access to your funds without paying a fee—often a certain number of months' worth of interest earnings.
Yes, CDs are generally still safe even if a stock market crash occurs. CDs are a type of bank account. Many accounts offer a set rate of return for a specific timeframe that won't fluctuate.
|Top Nationwide Rate (APY)
The Federal Reserve's inflation-busting rate hikes pushed annual percentage yields (APYs) on some CDs upwards of 5% in 2023. But with the central bank poised to pull back and cut interest rates, time may be running out for investors to take advantage of those exceptional APYs.
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.
Do you pay taxes on CD interest?
CDs—certificates of deposit—provide holders with taxable interest income. They are fixed-income investments issued by banks and pay interest at a stated rate for a specific time period. CD interest is taxed at the rates applicable to ordinary income, up to 37% at the top federal tax bracket rate for 2023.
Minimum and maximum amounts for CD investments
You can expect a minimum CD opening deposit of at least $500 at most banks, though that could rise to $2,500 or more for certain accounts. For example, CIT's Jumbo CDs require a minimum balance of $100,000. CDs with higher minimums often pay higher APYs.
Unlike the stock market or IRAs which can lose money, you cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity. In this case, the early-withdrawal penalty could eat up some or all of the interest earned.
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Alternative investments and cryptocurrencies.
- Real estate.
Pros. Offers higher interest rates than some other CD terms. A one-year CD typically offers a higher interest rate than shorter-term CDs, such as three-month CDs and six-month CDs. Offers higher interest rates than traditional savings accounts.
Some CDs aren't FDIC-insured, so they are a greater risk. Also, there are opportunity costs if you lock up money in a CD and interest rates rise or inflation outpaces the CD's interest rate.
CDs don't have monthly fees, but most have an early withdrawal penalty and don't let you add funds after the initial deposit. Like regular savings accounts, certificates of deposit are insured, so you get your money back in the unlikely event your bank goes bankrupt.
However, because of the higher interest rates, CDs may be seen as a slightly riskier option than regular savings accounts due to the potential loss of interest if you withdraw early.
But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Today, FDIC insurance guarantees $250,000 for each depositor at each FDIC-insured institution in any of these categories: checking accounts, savings accounts, money market accounts and certificates of deposit.
Are CDs at risk if a bank fails?
But, in the meantime, you can rest assured that your CD's funds are safe if you've opened an account with a bank insured by the Federal Deposit Insurance Corporation (FDIC). Even in the unlikely case of a bank failure, the government will protect deposits up to $250,000.
While no one knows precisely what a default would entail, consumers can rest assured that their Treasuries and certificates of deposit are reasonably safe.
- Savings Accounts.
- High-Yield Savings Accounts.
- Certificates of Deposit (CDs)
- Money Market Funds.
- Money Market Deposit Accounts.
- Treasury Bills and Notes.
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.
OnPath Credit Union High Yield Checking
OnPath Credit Union's High Yield Checking is also a transactional account, not a savings account. But it comes with an impressive 7.00% APY that surpasses what you'd normally see from checking accounts at brick-and-mortar banks or savings accounts at online-only banks.