3 Reasons to Absolutely Steer Clear of CDs -- Even With Rates at 5% (2024)

FAQs

3 Reasons to Absolutely Steer Clear of CDs -- Even With Rates at 5%? ›

When the Federal Reserve increases its benchmark rate, interest rates across the economy, including CD rates, increase. Similarly, decreases in the federal funds rate cause CD rates to fall.

When the Federal Reserve increases its benchmark rate, interest rates across the economy, including CD rates, increase. Similarly, decreases in the federal funds rate cause CD rates to fall.

The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022. Yet many banks are offering rates well above that—the best 5-year CDs have annual percentage yields (APYs) that exceed 4%, and some 1-year CDs are offering APYs well above 5%.

Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.

A CD may offer a higher interest rate and APY than a high-yield savings account or money market account. Returns are virtually guaranteed and you can easily estimate how much your money will grow. CD laddering strategies can help you to leverage changing interest rates and create liquidity.

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

It's possible to get a 6% certificate of deposit, but currently, they're only offered by credit unions, not banks. Pros of a 6% CD include locked-in interest rates and a relatively high rate of return.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

You could get stuck with a lower interest rate than what becomes available. Savings account and CD interest rates can fluctuate. With a savings account, your money will automatically start earning a higher return if interest rates go up. With a CD, however, you'll be stuck with whatever rate you locked in initially.

If you have money to save that you won't need to touch for at least six months, a 5% CD may be worth considering. These CDs earn rates well above the national average CD and savings rates, according to the FDIC. However, you should consider more than just APY when deciding whether or not a 5% CD is a good investment.

Should I break my CD for a higher interest rate? ›

When you open a CD, you lock in the interest rate for the entire term. If you open a CD when rates are low and rates then rise in a big way, it may be worth breaking your CD to secure a higher rate. For example, let's say that breaking your current CD will result in a $25 early withdrawal fee.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

CD rates benefited from a rising interest rate environment, while the Federal Reserve was raising the fed funds rate between 2022-2023.

Higher Interest Rates Compared To Other Savings Options

CDs typically offer higher interest rates compared to regular savings or money market accounts. Generally, the longer a CD's term, the more interest it pays, helping offset the loss of liquidity.

CDs are worth it in 2024 for the right investor. After rate hikes in the past year and a half, many of the best CDs yield well over 5% but these rates may not last for long. For some, it could be worth it to lock in high rates before the Fed starts cutting rates later in the year.

CD's are lossless waves meaning they offer better sound quality than MP3s when encoding audio into digital form. Whereas vinyl records lose some higher frequencies in conversion; thus CD's can get louder and deliver clear frequencies even at high volumes.

Projections suggest that we may see no rate increases in 2024, and that the Fed might start dropping its rate later this year, according to the CME FedWatch Tool on June 11. If the Fed rate drops, CD rates will likely follow suit, though it's up to each bank and credit union if and when that occurs.