The best CD types to choose now
While inflation and interest rates have caused many Americans to stretch their budgets, the flip side is that savers and investors have been able to enjoy higher yields on financial instruments like certificates of deposit (CDs).
By depositing money into a CD account, you can earn a fixed rate of return that often exceeds what you could get from a savings account. The downside, however, is that CDs often lack the same liquidity that savings accounts have, as you generally have to keep your money within the CD account for a designated period to avoid penalties and earn the full interest.
That said, there are many different types of CDs (including no-penalty CDs), each with their pros and cons, and you might find that some of these financial vehicles are a good fit for your financial situation. Start by exploring your CD account options here to see how much more money you could be earning.
The best CD types to choose now
Some of the most notable CD types include:
Short-term CDs
Short-term CDs provide a fixed interest rate in exchange for keeping your money within that CD account for a designated period, generally ranging from 1-12 months. Short-term CDs can offer the advantage of a lower early withdrawal penalty than long-term CDs, and your money is tied up in the account for a shorter period, explains Devin Carroll, owner and lead advisor at Carroll Advisory Group, a retirement planning and wealth management group.
That said, short-term CDs typically have lower interest rates than long-term ones, although that's not always the case, he adds.
If CD interest rates are expected to fall in the future or banks have certain liquidity needs, it's possible for short-term rates to rise above long-term ones. But even in more traditional circumstances where short-term rates are below long-term ones, short-term CDs can provide attractive returns without sacrificing much flexibility.
"These are great for an investor who needs liquidity in the relatively near term but is looking for a higher rate of return than that offered by a traditional savings account. They can also be implemented in a rising interest rate environment so that money can be reinvested later at a greater rate of return," says Carroll.
Long-term CDs
Long-term CDs typically provide a higher annual percentage yield (APY) than short-term ones, with the terms going up to around 10 years.
"If maximizing the rate you receive is your goal—and you're not worried about needing access to the funds you'll save with before the end of the term without paying a penalty—this can be a strong play that offers you a rewarding rate that's locked in," says Samantha Melting, SVP and head of Consumer Bank at Synchrony.
Even in circumstances where, say, a 1-year CD has a higher interest rate than a 5-year CD, a saver might prefer the 5-year one for the certainty it provides. Because after the 1-year CD ends, if someone wants to roll over their savings into another CD, it's possible that interest rates would have dropped below what they could have earned if they previously went with the 5-year CD.
"Long-term CDs can also be a great fit for longer term savings goals, or if you're simply uncertain that rates may rise in the future," adds Melting.
No-penalty CDs
While CDs tend to take back some of the interest you would have earned if you withdraw funds early, no-penalty CDs avoid this issue. These CDs let you take your money out without any fees, generally a few days after you deposit money into the account.
The downside is that no-penalty CDs typically have lower APYs than regular CDs of comparable durations. But they can exceed savings account interest rates.
"I like no-penalty CDs as an investment vehicle for emergency funds. There may be no intention of making an early withdrawal, but there needs to be the ability to do so if a rainy day comes along," says Carroll.
Brokered CDs
While many savers open CDs directly with banks, these vehicles can also be invested in through a brokerage account. With brokered CDs, a brokerage can repackage bank CDs and sell them to their own customers.
Typically, brokered CDs have the same FDIC insurance as regular CDs do, because they're still coming from banks, though customers should still confirm this. And because brokered CDs can come from multiple banks or financial institutions, the combined insurance limits can be higher than what someone might have if they bought all their CDs from one bank.
Brokered CDs can also have more liquidity than bank CDs, as they can often be sold before the maturity date. Depending on how interest rates change, selling a brokered CD early could either result in a gain or a loss on the principal balance.
Another potential advantage of brokered CDs is that they can have higher rates compared with "buying CDs directly from the bank because of competition amongst brokered CDs," says Christopher Manske, CFP, president and founder at Manske Wealth Management. Brokered CDs can offer "the convenience of owning multiple banks' CDs in a single account with a single financial advisor as the point of contact," he adds.
However, brokered CDs can also carry more associated fees than bank CDs, so savers/investors have to weigh these pros and cons.
Explore your CD account options here now and start earning more interest.
Bump-up CDs
For those who worry about interest rates going up while their money is locked in a CD, one option is to choose a bump-up CD.
The terms can differ depending on the institution that offers these CDs, but in general, they give you an opportunity at least once to raise your CD interest rate during the CD term if CD APYs go up.
You can have "FOMO no more if you're worried about missing out on an even better rate to come in the near term," says Melting. However, the starting rates for these CDs tend to be lower than those of comparable duration CDs, so it might not always work out in your favor.
The bottom line
There's not necessarily one best type of CD, because each comes with tradeoffs, and it depends on your financial situation and goals. The good news is that you don't have to pick just one. "We find that a mix of CD terms along with a high-yield savings account provides a great option for liquidity and maximizing returns to achieve savings goals that are both short- and long-term," says Melting.
