Why you should open a CD with your tax refund
Tax season is upon us and many Americans are awaiting a refund. While it can be easy to spend that money on unnecessary purchases, it can be smart to use your tax refund to put yourself on better financial footing.
After all, if invested properly, the money you receive from your tax return could grow more meaningful over time. And, one compelling way to get more out of your refund is to put it into a certificate of deposit (CD).
Open a CD today to lock in today's high returns.
Why you should open a CD with your tax refund
If you have a tax refund coming your way, it may benefit you to use the money to help you achieve your financial goals. Here are a few reasons a CD may be a great place to deposit the money from your refund:
CDs offer the potential for excellent returns
The Federal Reserve began increasing interest rates in March 2022 in response to high inflation levels. The Fed then raised its benchmark rate several times thereafter, pushing the federal funds rate to a 23-year high, where it sits today.
That's important because interest rates for lending and deposit accounts are impacted by changes made to the federal funds rate. And, because that rate was hiked numerous times, many of today's CDs offer impressive returns. For example, many 1-year CDs come with APYs over 5%.
Compare CD accounts now to find the right option for your needs.
High rates won't last forever
"This is a nice time to give some serious consideration to a CD if you are a risk-averse investor," says Matt Willer, managing director and partner at Phoenix Capital Group. "Rates appear to be heading down toward the end of 2024, so locking in a reasonable rate prior to that is advantageous."
The idea that rates could drop can make CDs even more attractive, as you lock in the rate for the full CD term when you open the account. So, you can use a CD to lock in today's impressive rates — protecting you from future rate decreases that occur during the CD term.
CDs are a safe place to store your cash
CDs are safe savings vehicles for two reasons. First, these accounts are typically FDIC- or NCUA-insured up to $250,000 per depositor, per account. So, if your financial institution becomes insolvent, this insurance covers the money you have deposited in your CD. And CDs also come with fixed interest rates. So, you'll know exactly how much money you'll earn when you open your account.
CDs can act as a safe-haven asset
In today's high-rate environment, using your tax return to open a CD could help diversify your investment portfolio with a safe-haven asset.
"The markets have been on a straight path to new highs," says Willer. "It might be a nice time to take some volatility off as we get closer to the elections and navigate through domestic and international uncertainty."
CDs could help you achieve your savings goals
Finally, a CD may help you achieve your savings goals. That's because, when you open your CD, you typically agree to keep your money in the account for the full term. If you decide to access your money early, you generally pay a penalty to do so.
And, if you're required to pay a penalty to access your money, you'll be less likely to tap into it before your account matures. As such, a CD can help you achieve your savings goals.
The best part is that CDs come in various terms. So, you should be able to find options to help you achieve your goals, whether they're short-, mid- or long-term.
The bottom line
The average tax refund for the week of February 16 was over $3,200, according to the IRS. And while the idea of spending that cash may seem appealing, investing it into a CD could have a meaningful impact on your long-term financial stability.
