6 top tips for choosing the best CD for your money

If you’re saving money, the beginning of 2024 has been good to you: The Federal Reserve hasn’t cut rates yet. However, that’s not going to last forever. Experts believe the Fed will cut rates three times throughout the rest of the year. If you’re thinking about opening a CD, it’s time to act now to lock in the best rate possible before CD rates begin to fall.

Reasons to invest in CDs

CDs are one of the lowest-risk places to park your cash. Here’s a rundown of some of the reasons why opening one can be a good fit for your financial goals:

• Guaranteed return: Rates on standard CDs are fixed. Unlike the stock market, which fluctuates, CDs offer a reliable return. This makes planning and budgeting easy since you’ll know exactly how much you’ll make and when you can withdraw the funds.
• Better earning potential vs. other savings accounts: CDs may pay more than other deposit accounts, such as savings and money market accounts.
• Keep spending in check: CDs have early withdrawal penalties, which can act as a helpful way to reduce your temptation to spend. Because you won’t want to forfeit your interest earnings, you’ll think twice before trying to withdraw the money.
• No need to pick just one: You can create a steady income stream for yourself by laddering CDs.
• Safety: CDs at federally insured banks and credit unions are protected.

Average CD rates steadily increased as the Fed hiked rates, and they have since leveled off. While the forecast for CD rates doesn’t look quite as promising, the best CDs are still paying above 5 percent and outpacing inflation.

Tips for choosing the best CD

Before doing anything with your money, it’s smart to look ahead to your future and determine your goals. As you think about what you want to be able to do with your money, it’s equally important to be prepared for a disaster. Make sure you have enough money in your emergency fund – typically at least three to six months of living expenses. Don’t put that cash in a CD, either. It’s better off in a high-yield savings account that will let you access the funds at a moment’s notice.

1. Decide the right term length

CDs typically require that you invest your money for a specific amount of time, called a term. During the term, you agree not to withdraw the money.

CD terms can range from as brief as a month to as long as five years. Some banks even offer 10-year CDs. Are you saving up to buy a car, take a vacation or make a down payment on a house? Determine when you need that money to choose a CD with the right term.

2. Shop for the best rates

With any investment product, the aim is to grow your money as much as possible. National averages for CD rates are low compared with what you can find by shopping around. For example, the national average for a one-year CD is just 1.81 percent APY, according to the FDIC’s most recent data. But there are banks that are paying a 5 percent APY and higher.

Online banks often pay better rates because they do not have the overhead of maintaining branches that traditional brick-and-mortar banks have.

3. Pick a CD with a minimum deposit you can afford

Financial institutions differ on the size of the deposit required to open a CD. Some banks, such as Ally Bank and Synchrony Bank, do not have deposit minimums.

Many banks, though, require you to put down at least $500 or $1,000. Others require $5,000 or more. The minimum deposit requirement may depend on the type of CD you open. Jumbo CDs often require deposits of $100,000.

4. Check for early withdrawal penalties

Banks penalize CD account holders who withdraw their money before the CD matures. To find the details of these charges, read the fine print of your account agreement.

Early withdrawal penalties can vary widely, from 60 days of interest to 365 days or more of interest. Typically, the longer the CD term, the higher the penalty fees.

“Because of early withdrawal penalties, it is important to align the point where you’ll need the money with the maturity of the CD,” says Greg McBride, chief financial analyst at Bankrate. “Liquid and no-penalty CDs exist, and are a consideration, but often carry lower yields because of the flexibility.”

5. Choose the right type of CD

CDs come in many varieties, so you’ll want to compare a range of options before locking up your money.

For example, a no-penalty CD, sometimes called a liquid CD, lets you skip worrying about the fourth step in this checklist. This option will not penalize you for withdrawing your money before the term ends. If you think you might need the money before the CD matures, or you want the option to withdraw it penalty-free to pursue a better investment, a no-penalty CD can be a good choice. The trade-off is the APY probably will be lower than it is on a traditional CD.

If you expect to get a nice bonus at work, you might consider an add-on CD, which lets you add money to the account during the term. However, these are relatively rare, and they tend to pay lower yields than traditional CDs and no-penalty CDs. IRA CDs are an alternative that tend to have lower yields, but they have tax advantages.

Bump-up and step-up CDs are slightly different, but both products let you obtain a higher yield if rates rise. And right now, neither of these are a great option due to the expectation that rates will fall.

6. Make sure you’re doing business at a federally-insured bank or credit union

Shop only with banks and credit unions that are protected by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Association (NCUA) Share Insurance Fund. If your bank or credit union were to fail, your money would be protected.

Federal deposit insurance covers up to $250,000 per depositor, per FDIC bank, per account ownership category. Some banks offer a service that spreads money around to a network of insured banks to give customers with large deposits more insurance coverage.

You can use this tool to find FDIC-member banks or this tool to find NCUA-member credit unions.

Bottom line

A CD can be a high-yield, safe investment when you’re able to lock in the money for a set term. To get the most for your money, be sure to shop around for the best rate, select a term you’re comfortable with and go with a bank or credit union that’s federally insured.

–David McMillin updated this article.