You can earn hundreds of dollars or more
If you open a 2-year CD with a rate of 4.20%, for example, you'll earn approximately $483 on your $5,000 deposit. If you keep the money in longer, you'll make even more. A $5,000 5-year CD at 4.35% will leave you with a profit of around $1,187.
As Beene notes, "The recent rate cuts by the Fed have already produced small drops in the rates of CD and savings accounts at many major banks, and we're going to see that continue if interest rates drop. If you want to lock in a certain rate a CD currently provides, it would be a good idea not to wait."
From mid-2023 to September 2024, many banks offered attractive certificate of deposit (CD) rates of around 5%. But now that the Federal Reserve has been cutting rates, CD yields are dropping too. Despite lower rates, CDs remain a solid option for growing your savings.
The national average 1-year CD APY started 2024 at 1.96% and ended the year at the same level. Similarly, the average APY for 5-year CDs started at 1.41% and ended at 1.42%. McBride predicts that by the end of 2025, the national average APYs for 1-year and 5-year CDs will be 1.25% and 1.35%, respectively.
Key Takeaways
For CD terms longer than one year, you will have to pay taxes on interest earned each tax year during the CD term. For CD terms of one year or less, you will have to pay taxes on interest earned and received. Early withdrawal penalties offset taxes owed on CD interest.
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.
There are two high-yield checking accounts with interest of at least 7%, though: BCU PowerPlus Checking and Landmark Credit Union Premium Checking Account. Both come with major downsides, though. Are 7% interest savings accounts safe?
When you're investing a large amount of money in a CD, a high yield can earn you thousands of dollars more than a low one. If you were to deposit $100,000 into a one-year CD that pays a competitive APY of 5 percent, you'd have around $5,000 in interest when the term is up, for a total balance of $105,000.
Suppose you invest $5,000 in a five-year CD paying 5% per year, with no compounding, and you make no additional contributions along the way. You would earn $250 per year, and your $5,000 would become $6,250.
The biggest potential risk to your CD balance is fees. CDs typically come with early withdrawal penalties to keep account holders from dipping into their funds before maturity. These penalties can significantly reduce your overall return.
If you have $5,000 in cash to deposit into a CD, you could earn over $1,000 in interest, depending on the term you choose. With a CD, you lock in your rate when you deposit your money, so your earnings stay the same throughout the CD's lifetime, or term.
Shares: Buy stocks and shares in a company and you'll earn money if the value of the company rises. Naturally, there's risk involved if the company performs poorly, but if it does well, you could benefit from growth and dividend payments. Bonds: These are issued by companies or the government as a kind of debt.
Safety and security: You can save money in a CD without worrying about a stock market plunge or other risks. CDs come with fixed interest rates and FDIC or NCUA insurance, which could protect your money even if your bank fails.
Risk factors: Both no-penalty CDs and high-yield savings accounts are considered low-risk investments. However, it's essential to note that they are not entirely risk-free. There is always a possibility of losing purchasing power due to inflation.
A 6-month CD can be a good option if you are looking for a safe place to park your money for a short period. With a 6-month CD, you can earn more interest than a regular savings account without the risk associated with stocks or bonds.
And you typically don't have to pay taxes on your earnings until you make withdrawals in retirement. To defer taxes on CD interest until retirement, you can open a CD within a tax-deferred retirement account — whether it's an employer-sponsored plan or an IRA.
You might be charged the equivalent of three months' interest for an early withdrawal from a CD that matures in six months or less. If you have a five-year CD, the penalty might be 12 months' worth of interest.
Should I open a CD now or wait? It might be a good idea to get a CD now, since rates are expected to drop in the future. "If they want to get in the market for a CD, now might be the better time to lock in that higher yield, so they're shielded — at least for the near term — as rates continue to drop," says Stroup.
CD account interest rates will stay the same
Hughes says that if the current economic trends remain stable, he expects CD rates to stay mostly the same in 2025. "The market is always forward-looking and trying to price in potential outcomes.