If you want to stash your cash somewhere safe but don’t want to deal with an ultra-low annual percentage yield (APY) in your savings account, you can put your money into a certificate of deposit (CD) instead.
You’ll not only earn a higher APY, but you’ll also be restricted from taking withdrawals for a period to encourage you to keep your money where it is.
Understanding what CDs are and how to get the best rates can help you get the most for your savings.
What is a CD?
A CD is a lot different than your typical savings account. With a savings account, for example, you can typically deposit and withdraw money whenever you want. But with a CD, you agree to leave your money in the account for a specific period.
The only reason to ever consider a CD, even in good times, is when you have a definite plan for a chunk of your savings in a specific time frame”
Because the bank knows the money isn’t going anywhere, it’s willing to offer a higher APY on CD accounts. If you do access the money during the preset period, you’ll usually have to pay a penalty, which can be a flat fee or a percentage of your interest earned.
You can get a CD for just a few months or as long as a decade. The right term length depends on when you think you’ll need the money. And of course, the longer the term, the higher the interest rate.
“So, you preserve the basis of the money, trading opportunity for greater interest to get safety,” says John Brandy, a financial consultant and Certified Financial Educator. “And when the due date comes, the money is there.”
CDs are great for people who want to earn a little interest but don’t want to take any of the big risks that come with investing in stocks and bonds. However, you won’t want to put your money in a CD, if you think you’ll need the money soon.
Specifically, avoid putting your emergency fund in a CD because you have no idea when you’ll need the cash.
The best CD rates on the market
If you’ve decided that a CD is right for you, now it’s a matter of finding the one that offers the best rates and other features. You may be tempted to head down to your local credit union or bank. But if you don’t shop around, you might end up with a lower APY than you could earn elsewhere.
To help you narrow down your choices, we’ve put together a list of the best CD rates on the market today. Since rates can vary depending on how long your term is, we’re going to show you some rates based on a one-year term for February 2018.
1) TIAA Bank
With TIAA Bank, you’ll get an impressive 1.40 to 2.85% APY. The only drawback is that you have to deposit at least $1,000 to open a CD with the bank. TIAA Bank states on its website that early withdrawal penalties apply. Bbut it doesn’t share what those fees are because they can differ depending on your term and how much you deposit.
2) Ally Bank
Matching EverBank’s rate, Ally Bank offers up to a 3.00% APY on one-year CD deposits. The catch is that you have to deposit more than $25,000 to get that rate. If you have less than $5,000, you’ll get a 1.75% APY.
If you don’t want to deal with an early withdrawal penalty, Ally offers a no-penalty CD with an 11-month term. The same APY tiers apply, and they’re not as impressive — 1.15% APY (less than $5,000), 1.25% APY ($5,000 or more), and 1.50% APY ($25,000 or more).
Matching Ally Bank’s mid-range APY, Synchrony Bank offers AN APY of up to 3% APY. What’s more, the minimum deposit is just $2,000.
Like the other banks we’ve listed, Synchrony’s CD has an early withdrawal penalty. But it’s more transparent upfront about how to calculate it. For example, on a one-year CD, the penalty is 90 days of simple interest at the current rate on your account.
The retail banking arm of one of the biggest investment banks in the world, Marcus offers impressive CD rates of up to 3.15 APY. The minimum deposit is just $500,
making it more accessible to people who don’t have a lot of cash lying around.
And to make it even more appealing, Marcus promises to offer you the highest APY the bank offers for your CD within the first 10 days after you open the account, assuming you deposit at least $500 during that time.
Offering an APY of up to 3.1% APY, Discover is another great option for CD rates. However, its minimum deposit is $2,500, so it might not make sense to apply if you can get a better rate somewhere else with a lower deposit.
Which CD should you choose?
Before you decide which CD is best for you, ask yourself if getting one in the first place is your best option.
“The only reason to ever consider a CD, even in good times, is when you have a definite plan for a chunk of your savings in a specific time frame,” says Brandy. “For example, you plan to pay off your car or house in six months. You don’t want that money to be at risk in the market. It’s really the only good use of CDs.”
As you may have already noticed, each of these CDs is offered by direct banks, which operate mostly, if not completely, online. If you feel uncomfortable using a bank that doesn’t have brick-and-mortar branches you can visit, consider a traditional bank like BBVA, which offers a 1.50% APY and a minimum deposit of $500.
If that’s not a concern for you, consider how much you plan to deposit and pick the bank with the highest yield for your deposit amount.
Also, make sure to compare other CD rates to see if other options might suit you better. As you do your due diligence, you’ll be in a better position to get the best deal that you can qualify for.
FAQ on Certificate of Deposit
Are Certificates of Deposit worth it right now?
CDs are seen as safe bets for saving or investing since they are federally insured and returns are guaranteed. And when CD rates go up, as they have in the past year, you’ll earn more money. But locking up funds in CDs for months or years isn’t the best move for everyone.
Can you withdraw interest from a CD without penalty?
You can only withdraw interest credited in the term before maturity of that term without penalty. You can withdraw interest any time during the term of crediting after it is credited to your account.
What happens if you take money out of a CD before it matures?
Typically, you will pay an early withdrawal penalty if you withdraw funds from your CD before it matures. Ally Bank, however, offers a No Penalty CD, which allows you to withdraw all your money, including interest earned, without any penalty, any time after the first six days following the date you fund your account.
What is a no-penalty CD?
A no-penalty certificate of deposit is a type of CD that has no fee for withdrawing money before the term expires. You generally can withdraw the full balance any time starting the week after the day you fund a CD. In contrast, when you withdraw early from a regular CD, you pay at least several months’ of interest earned.
Do you have to pay taxes on a CD when it matures?
You should not owe any tax on the principal, because that should be the same as the amount you put into the CD. However, CD interest is taxable. That tax is not triggered by the maturity of the CD, but is payable on the amount of interest the CD accrues each year.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.