The bottom line
By depositing $10,000 into a CD now, you can take advantage of currently high rates, protect yourself against future rate cuts and enjoy significant returns on a low-risk investment. Plus, you'll have the added benefit of security, knowing that your principal is safe and your returns are guaranteed.
Example: Early withdrawal penalty for a five-year CD
Annual interest rate: 2% Early withdrawal penalty: 12 months' interest.
You can earn hundreds of dollars
A 1-year CD comes with a rate of 4.52% right now, approximately. That's $452.00 earned on a $10,000 deposit – or 976% better than the minimal $42 you'd earn with the same deposit in a traditional savings account.
Losing money in a CD is highly unlikely. However, it's not impossible. If you're thinking about opening one, read the fine print about early withdrawal penalties, and be sure to compare more flexible options that don't have a maturity date. And even if you decide to open a CD, don't set it and forget it.
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)
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.
Is CD interest taxable? All types of income you earn in a taxable year must be reported to the IRS. That includes the interest on your CDs. As you earn interest on your CD even before it is fully matured, it is still considered taxable income and subject to the annual federal income tax.
You can still earn a yield of 4 percent APY on a 5-year CD. Of course, you could earn much more in the stock market, but you could also potentially lose all of your money invested in the market also. So for safe money that you can't afford to lose and don't need during the CD term, a CD can make sense.
How much interest would you earn? If you put $20,000 into a 5-year CD with an interest rate of 4.60%, you'd end the 5-year CD term with $5,043.12 in interest, for a total balance of $25,043.12. Not all CDs offer that interest rate, though.
If you put $500 in a CD for five years, how much would you make? This depends on the CD rate. A five-year CD at a competitive online bank could have a rate of 4.00% APY, which would earn around $108 in interest in five years. A five-year CD with a 1% rate would earn about $26.
Any amount you deposit in a CD should be money you're comfortable locking up for the full term length. First, you should have enough cash in an emergency fund to cover at least three months of expenses, and this cash should be in an account where you can access it at any time without penalty.
CD rates remain at levels we haven't seen in years, and many financial institutions are offering rates of 4% to 5% or more on their long-term CDs. With a rate that high, a $10,000 investment in a 5-year CD could potentially grow to over $12,000 by the end of the term — and that's without any additional contributions.
The best investment for 10k includes different types of tax-free investments, such as pensions, stocks and shares ISAs and lifetime ISAs. You can choose what to invest in within these products. Each tax-free investment type comes with an annual allowance, and you choose how best to invest your ISA allowance.
5-year CD returns on $100,000
The returns you would earn on a 5-year CD are as follows: At 4.0%: $21,665.29, for in a total balance of $121,665.29 at the end of the term. At 4.5%: $24,618.19, for in a total balance of $124,618.19 at the end of the term.
While naming a TOD beneficiary can help your heirs avoid the probate process, it doesn't confer any tax benefit. It doesn't help you to avoid estate taxes, and your heirs will still have to pay income tax on the earnings of a certificate of deposit (CD) after you pass away.
Roth Individual Retirement Account (IRA) or Roth 401(k): Interest earned in a Roth account is not taxed until it is withdrawn. And, if you are older than age 59 ½, you will owe no income taxes at all on the interest. However, early withdrawals before age 59 ½ incur a 10% penalty in addition to any income tax due.
A certificate of deposit can be a wise investment at any time. Unlike savings rates, CD rates are fixed when you open an account, which means your earnings stay the same regardless of where overall rates go. And in today's falling-rate environment, that can be especially beneficial.
Key Takeaways
CDs insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 cannot lose money even if the bank fails. However, some CDs that are not FDIC-insured may carry greater risk, and risks may come from rising inflation or interest rates.
Like IRAs and 529 plans, there are a variety of investments you can buy within an HSA, and your options depend on the financial institution that holds your account. If you invest in CDs within your HSA, you can avoid paying taxes on the interest, provided you use distributions to pay for qualifying expenses.
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.
While there aren't any financial institutions paying 7% on a CD right now, there are other banks and credit unions that pay high CD rates. Compare today's top CD and savings rates.