Certificates of deposit (cds)?
A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. Withdrawing money early means paying a penalty fee to the bank.
Are CDs a good investment? The answer depends. CDs can be attractive for those willing to sacrifice returns for security, especially in higher interest rate environments. However, bonds and bond funds might be more suitable in lower interest rate environments.
- Elements Financial – 5.50% APY.
- ConnectOne Bank – 5.40% APY.
- Apple Federal Credit Union – 5.40% APY.
- Alliant Credit Union – 5.40% APY.
- Bask Bank – 5.40% APY.
- Live Oak Bank – 5.40% APY.
- Home Savings Bank – 5.40% APY.
- Marcus by Goldman Sachs – 5.40% APY.
| Top Nationwide Rate (APY) | Total Earnings | |
|---|---|---|
| 1 year | 6.18% | $ 618 |
| 18 months | 5.80% | $ 887 |
| 2 year | 5.60% | $ 1,151 |
| 3 year | 5.50% | $ 1,742 |
The cons of CDs
With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.
Interest Rate Risk
When rates are high, your CDs will generally yield a better return. But when rates are low, money held in CDs won't grow as much. CDs carry interest rate risk in that it's possible to lock in savings at one rate, only to see rates climb.
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.
How to avoid taxes on CD interest. One way to postpone being taxed on CDs is to put them in a tax-deferred individual retirement account (IRA) or 401(k). As long as money placed in a traditional IRA is below the annual contribution limit, interest you earn may be tax deductible.
How much will you earn if you put $20,000 into a 1-year CD? You can currently get a rate of up to 5.67% on a 1-year certificate of deposit. If you were to put $20,000 into that account, you would earn $1,134 in interest in a year, for a total of $21,134.
The bottom line
If you put $10,000 in a 5-year CD right now, you could be looking at earnings of more than $2,000 when the CD matures. Ultimately, CDs can be part of a successful financial strategy, as long as you make the right choices and shop for the best available rate.
Why not to buy a CD?
CD drawbacks
Lower returns: If you're looking for a way to build wealth, CDs may offer only limited benefits. You could get better returns for your money by putting it into the market and buying stocks, mutual funds, or other investments instead.
Although CDs can help protect your savings from market volatility while still earning more interest than a traditional savings account, they don't have the same long-term earnings potential of stocks and bonds. Despite economic fluctuations, brokerage accounts may provide greater returns over time.
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.
As you can see from the scenario above, choosing to be paid at maturity can sometimes earn you more in interest, because the higher interest rate can offset the value of compounding interest on the monthly option. Plus the longer you stow your money away, the more interest you'll earn.
High-Dividend Stocks
Treasuries, CDs and most other conservative investments are often considered “safe” because they have little to no market risk. In other words, they don't generally trade down in value.
As part of a portfolio that includes cash, CDs can provide stability and security. However, CDs are unlikely to provide you with the returns you need to build wealth for the future or live off the interest — unless you already have a large amount of money and ladder your CDs to avoid penalties.
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.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Investors typically flock to fixed-income investments (such as bonds) or dividend-yielding investments (such as dividend stocks) during recessions because they offer routine cash payments.
You can rollover your 401(k) account into a CD without any penalties or taxes. But you need to make sure you're rolling over into an IRA CD, specifically. And always ensure to roll over into a like-kind account, whether a traditional or Roth retirement account, or you might get hit with a surprise tax bill.
Does opening a CD help with taxes?
Interest on CDs and share certificates is generally taxable unless you open an IRA CD, a special tax-advantaged CD account you use to save for retirement. Essentially, an IRA CD is a CD that is held in a retirement account. You can choose between traditional and Roth IRA CDs.
Many experts agree that there's a good chance that CD rates will top out this year and moderate as 2024 begins. If a recession happens in late 2023, the Federal Reserve will likely start cutting interest rates, which will drive CD rates down.
Which banks offer 7% interest savings accounts? Only two financial institutions, Landmark Credit Union and Alpena Alcona Area Credit Union, currently offer 7% interest.
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
A 6-month CD may be a good idea if you'd like to earn a competitive interest rate on a short-term, fixed-interest savings account.
