Best CD Rates – December 2019

What Is a CD Account?

A certificate of deposit is known as a CD and is used by consumers to save money for longer periods of time. A CD is a safe method to save money because up to $250,000 of the money allocated into the account is backed by the federal government.

A CD account can be opened through a bank or a credit union. At a credit union, the account is called a share certificate. Credit union share certificates are also insured by the U.S. government.

A CD is a kind of savings account, but unlike traditional savings accounts, it has a fixed interest rate and fixed date of withdrawal. The maturity date is when money from the CD can be withdrawn. Monthly fees usually are not charged for owning a CD.

The goal of a CD could be to save money for a vacation, a large purchase such as an appliance or as a down payment to purchase a vehicle or home.

Unlike a savings account, if you withdraw money from a CD before the term is up, you will lose some of the interest earned in the form of a penalty. Depending on the terms set up by the bank, you could also lose some of the principal amount.

In a savings account, you can withdraw money at any time without paying penalties or losing the interest that was already earned.

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How Does a CD Work?

Once you open a CD, you normally cannot make additional deposits into the account. For instance, if you get a refund from the IRS or a bonus from your employer after you open a CD, you cannot add money to the first CD. Instead, you need to open a second CD with the additional funds. Consumers often have several CDs with different maturity dates for different purposes, such as saving money for a down payment for a mortgage or buying a new piece of furniture or electronics. It is also common to have CDs at more than one bank or credit union, depending on what is being offered.

The goal of a CD is to leave the amount of money allocated into the account untouched. Each CD has a maturity date, or the length of time you leave your money in the account. The maturity dates vary from one month to five years, but the most common ones are one year, 18 months or two years. The longer maturity dates typically offer higher interest rates as an incentive to the consumer.

If you need to withdraw all or some of the money in a CD early, banks and credit unions typically charge a penalty. The penalties are usually a percentage of the interest accrued in the account, such as a minimum of 60 days of interest. Check the terms of the CD, because in some cases, the penalty is larger and will include a portion of the principal, or the original amount of money you put into the CD.

The majority of CDs will automatically renew after the maturity date. For instance, if you chose a 12-month CD and decide to keep the money in the CD, the bank will automatically roll it over into another 12-month CD.

Compare the rates at your bank and other financial institutions before the maturity date to see which one is offering the most competitive rates. Most banks offer a grace period, such as 10 days starting on your maturity date, so you can decide whether to use the funds, transfer them or roll them over into another CD of the same or different maturity date.

If your financial goals change, a shorter or longer maturity date could be a better decision. Depending on the current market conditions, sometimes a five-year CD will offer the same or better rates than a six-year CD.

Any interest that is earned in a CD will be taxed by the IRS at the ordinary income tax rate, similar to interest earned in a savings or money market account. However, if you open an IRA CD in a traditional individual retirement account, the contributions are tax-deductible, but withdrawals are still taxed.

One reason consumers chose to invest their money into a CD is because banks, especially online-only banks, offer competitive rates.

"Most CDs yield higher rates than savings accounts, however, you cannot withdraw your money until the end of the set term, otherwise you may incur a penalty," says Evan Kulak, co-founder of Polaris Portfolios, a robo advisor.

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What Should You Use a CD For?

The goal of a CD is to save money for future purposes, whether it is for a vacation, a large purchase such as an appliance, electronics or as a down payment to purchase a vehicle or home. The money allocated into a CD should help a consumer pay for purchases in cash and avoid accruing debt and putting an expensive item on a credit card.

With their higher interest rates, CDs give people an incentive to save money that they will not need for at least a year or even longer.

Experts recommend that consumers create a rainy day fund that can be used for emergencies, such as a car or home repair, in a savings account, because you can withdraw money at any time without having to pay a penalty or forgoing a portion of the interest that you earned during the period.

CDs are also a good investment option for individuals who want part of their portfolio to be less volatile than assets like stocks, which can lose their entire value. Since CDs are backed by the federal government, they are a safe investment with a guaranteed interest rate, and investors do not lose the principal amount unless they withdraw money from the account too soon. You can open CDs from a bank or a credit union, but also in a retirement account such as IRA CD in a traditional IRA.

"CDs are a smart place for money you do not need to access in the immediate term but are not comfortable investing in riskier assets such as REITs or stocks," says Kulak. "If you already have a sufficient safety net and still have a cash reserve, a CD may make sense."

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How to Open a CD Account

You can open a CD account through your current bank or credit union. Some banks will require that you have an existing checking or savings account in order to open one online.

The majority of banks allow people to open an account online, over the phone, by mail or in person at a branch. If you are opening a new account, a bank will require identification such as a driver’s license, Social Security card or passport. You will need to provide other basic information like your address, date of birth and contact information such as phone or cell number and email.

Each bank or credit union has different rules about the minimum amount of money you have to deposit into a CD.

You can open a CD for a minor, such as a child or grandchild. These are called custodial CD accounts. Since you have custody of the account, you retain all the control and can prevent minors from cashing out of one before the maturity date.

A CD can also be opened as a joint account, depending on the terms of the bank, according to several bank websites.

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How Safe Is Your Money in a CD?

A CD is one of the safest methods to save money, because up to $250,000 of the money allocated into the account is backed by the federal government, either via the Federal Deposit Insurance Corp. or the National Credit Union Administration.

"CD rates are widely considered as true risk-free rates in two ways," says K.C. Ma, a chartered financial analyst and director of the Roland George investments program at Stetson University. "First, it has less default risk than the U.S. Treasury Bill rate since CDs are insured by FDIC. T-bills are often sold in a large minimum denomination ranging from $1,000 to $10,000 or $100,0000, so it is often not directly investable to retail investors."

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Are CD Rates Going Up?

CD rates seem likely to keep rising since the Federal Reserve has indicated it is on track to increase interest rates through 2020. The Fed, the central bank of the U.S., began raising rates in December 2015, the first time it had done so since June 2006. The Fed's decision to raise interest rates depends on various economic conditions, such as the gross domestic product, inflation, unemployment rates and the number of homes sold.

"If the economy continues to improve and the Fed moves forward with its scheduled rate hikes, it is likely that CD rates will go up," Kulak says. "However, rising interest rates for CDs will also be influenced by loan demand and inflation. If either loan demand or inflation increases, we should see an increase in CD yields."

One drawback is that if CD rates rise and you are locked into a one-year or longer maturity, the only way to get a higher rate is to open another CD or pay a penalty to withdraw money from your current CD to move into one with a higher rate.

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Should You Open a CD for Your Child?

You can open a CD for a minor, such as your children. These are called custodial CD accounts. Since you have custody of the account, you retain all the control. Depending on the bank, you keep control until the minor becomes 18 or 21.

Having a CD for your child can be a good way to teach the importance of saving money and how compound interest works. Your child can see how money grows and why it is good to have money saved for a future purpose such as buying an expensive item.

"If you are looking to use a CD to invest for your child's education or future life event, an investment account is likely a better option," says Kulak. "However, if you are looking to teach your child the benefits of saving and compounding interest, a CD is a great tool. When opening a CD for your child, it is important to research the tax, ownership and financial aid implications."

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Why an Online Bank May Be the Best Choice for a CD

Internet-only banks tend to offer better interest rates for CDs than institutions that have to pay overhead for their brick and mortar branches. Even banks that only have an online presence are backed by the FDIC, so your investment remains safe.

Always shop around to see whether your current bank, credit union or an internet-only bank offers the best rates.

After your CD matures, you can opt to transfer the amount to another bank that has ATMs or a physical branch. Online banks always have the option to link your account to a brick and mortar bank or credit union electronically.

"Online banks and credit unions do not have the same physical infrastructure as traditional banks and credit unions nor the associated costs," says Kulak. "Online banks and credit unions are able to pass along the saved expenses in the form of higher interest rates. Historically, online banks and credit unions have offered significantly higher-yielding CDs than brick and mortar banks and credit unions."

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What Is a CD Ladder?

A CD ladder is a strategy in which you invest in CDs with different maturity dates. This means you stagger your deposits so that CDs will come due at different intervals, says Kulak.

"This provides two main benefits: It reduces interest rate risk and provides greater liquidity as you have access to your money at specific intervals," he says.

Interest rates could rise from when you open your first CD until you open a second one, and creating a ladder allows you to capture the upside of interest rate moves. This could be a good strategy, especially since the Federal Reserve has been raising interest rates since 2015 and has indicated it plans to continue doing so. Having a CD ladder also means you will always have a chunk of money saved for a future goal and can avoid the volatility in other investments like stocks.

The maturity dates on CDs range from very short term such as one month to longer term such as five years. This is advantageous for people who have trouble saving money or for people who like saving up for the likes of holiday shopping, a new piece of furniture or a vacation.

A CD ladder means you will more often be liquid – every six months or each year a CD could mature, for example, giving you access to your savings to pay for a trip or in case you need to pay down debt or an unexpected bill.

There is no set number of CDs you need to have in a CD ladder – some people like to have both shorter-term maturities such as nine months, while others prefer two years. You can open different CDs in your ladder, such as bump-up, step-up, liquid, jumbo, IRA, zero-coupon, callable or brokered.

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What Other Types of CDs Are There?

There are many kinds of CDs available through a bank, credit union or brokerage account. Depending on your goals, having more than one type of CD could be beneficial for your financial needs.

Bump-up. This CD gives you the option to request a higher rate if your bank or credit union increases its annual percentage yields. Typically, you can only request a bump-up one time, Kulak says. Due to the bump-up feature, these CDs typically have lower rates than a similar CD without a bump-up option.

Step-up CD. With this CD, you can increase your rate at certain intervals.

Liquid CD. If you hold such a CD, you're permitted to make withdrawals at any time without a penalty. However, the trade-off is you receive a lower rate than a traditional CD of the same term.

Jumbo CD. This is similar to a regular CD except jumbo CDs typically require a minimum balance of $100,000. In exchange for the higher minimum, these CDs may have a slightly higher interest rate than a regular CD.

IRA CD. A regular CD can be held in a qualified retirement account such as a traditional IRA or Roth IRA.

Zero coupon. This kind of CD is sold at a deep discount to its face value. Unlike a regular CD, there are no interest payments paid to the investor. Upon maturity, you receive the face value of the CD. For example, you could buy a $75,000 zero coupon CD for $50,000. After seven years, it would be worth $75,000.

Callable CD. A callable CD provides the bank or credit union with a call option. The bank can call away the CD – returning your funds and interest to date – before the CD matures. As the CD holder, you are taking on more interest rate risk than with a regular CD. To compensate you for the risk, banks or credit unions may pay investors a higher interest rate.

Brokered CD. This is a CD sold through a brokerage firm. Brokered CDs do not require you to open an account at a bank, and they can be traded on secondary markets. They typically offer higher interest rates than local CDs.

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Glossary

APY. The annual percentage yield is the effective annual rate of return of one year and also tabulates the effect of compounding interest.

CD ladder. A CD ladder is a strategy in which you invest in CDs of different maturity dates. This means you stagger your deposits so that different CDs will come due at different intervals.

Certificate of deposit. A CD is one kind of a savings account, but the difference is that it has a fixed interest rate and fixed date of withdrawal. The maturity date is when money from the CD can be withdrawn, otherwise a penalty is charged if the money is taken out earlier. Monthly fees are not charged for owning a CD.

401(k) plan. A 401(k) is a retirement savings plan that is sponsored by an employer. No taxes are paid on the money invested in the account.

529 plan. A 529 is a tax-advantaged savings plan where the proceeds must be used for higher educational purposes.

IRA CD. A regular CD that is held in a qualified account such as a traditional IRA or Roth IRA, offering tax advantages.

Jumbo CD. Similar to a regular CD except jumbo CDs typically require a minimum balance of $100,000. In exchange for the higher minimum, these CDs may have a slightly higher interest rates than a regular CD.

Money market account. These are similar to having a savings and checking account rolled into one account. The interest rates are higher than a savings account and similar to a CD. They also allow you to pay bills and withdraw money, but the account holder could be limited to a certain number of transactions each month. Money market accounts also have a minimum balance and monthly fees, but are backed by the FDIC. On the other hand, money market funds, often used in brokerage accounts, are not backed by the FDIC.

Renewal grace period. This is the time a bank or credit union gives you before rolling over your current CD into one of the same maturity.

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