3 ways to take advantage of high CD rates

If you’re comparing places to park your money right now, you might be asking one key question: Why are certificate of deposit (CD) rates so high? The reason is fairly simple: The Federal Reserve is still keeping rates steady. After 11 rate hikes to fight inflation, the latest Fed meeting didn’t result in any movements, which is great news for savers who want to capitalize on higher yield potential.

No one knows for certain whether another Fed rate hike could occur (doesn’t seem overwhelmingly likely) or when rates will come down (eventually, but it’s taking longer than experts expected at the beginning of the year). However, because standard CD APYs remain fixed for their entire term, locking in a high yield now could be beneficial. If rates drop after the next Fed meeting in September, you’ll be able to applaud your early action.

Here are three ways to take advantage of CD rates while they remain high.

1. Open a high-yield CD

Unlike savings accounts — which typically feature variable APYs that the bank can raise or lower at will — most CDs come with a fixed APY that won’t change throughout the CD’s term. Even if the going rates for deposit accounts start to decline, funds in a fixed-rate CD will continue to earn the same yield until the term is up. This guaranteed rate is a significant benefit a CD can provide in a falling-rate environment.

Reasons to shop around: CD rates often vary widely among banks, so experts recommend shopping around. For instance, if you’re a customer of a large brick-and-mortar bank, you may need to look elsewhere because such institutions tend to offer significantly lower APYs than online-only banks.

National average rates are somewhat higher, with the current average APY for one-year CDs being 1.80 percent, according to Bankrate data. However, various CDs earn nearly three times that average, with the top one-year CD earning a 5.26 percent APY.

Credit unions are another option to take advantage of CD rates. These not-for-profit institutions are owned by their members, so they’re able to provide better saving and lending rates.

When shopping around, look for a bank that’s insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured through the National Credit Union Administration (NCUA). Under such federally insured banks and credit unions, CDs and share certificates are insured up to $250,000 per depositor, per insured bank, for each account ownership category.

“As long as you’re dealing directly with a federally insured bank or credit union, any additional yield you find is pure gravy as you’re not taking any incremental risk in order to earn that return,” McBride says.

The following comparison table shows how much you’d earn on $5,000 in a one-year CD that earns a low yield, one that earns the national average yield, and one that earns a highly competitive yield:

What to watch out for: As a rule of thumb, avoid putting funds into a CD that you might need in the meantime for emergencies or living expenses. A liquid savings account is a better place for money you might need for an unexpected car repair, a visit to the doctor, or to pay next month’s rent. This is because a CD typically locks in your funds until it matures, and taking the money out sooner triggers an early withdrawal penalty. Another option is a no-penalty CD, although these often earn lower APYs than standard CDs.

2. Renew an existing CD at a high rate

When a CD’s term ends, there will typically be a grace period between seven and 14 days, during which you can either withdraw the funds or renew the CD. (Doing nothing often results in the CD being renewed automatically for another term of the same length.) If you choose to renew the CD, your new rate will usually be whatever the bank is currently paying for a new CD with that same term.

Why it might be beneficial to renew a CD that’s maturing: In today’s high-rate environment, if your CD will renew at a rate that’s competitive, it might be in your best interest to renew it. This way, you’re locking in a high rate at a time when rates may start to fall.

An alternative would be putting the money into a different high-rate CD with a term that better suits your needs. For instance, if your two-year CD is about to mature and you plan to use the funds for a down payment on a house in a year, you might choose to put the funds into a new CD with a term of just one year.

What to watch out for: Even if you can renew your CD at a highly competitive rate, don’t choose this option if you might need the funds in the meantime. Otherwise, you’ll likely be hit with an early withdrawal penalty. If you’ll need the money soon from a CD that’s maturing, the best place for it may be a high-yield savings account, because these types of accounts don’t charge a penalty for on-demand access to the funds.

3. Consider a CD ladder

A CD ladder strategy involves opening multiple CDs with varying maturity dates. This could be beneficial for anyone who wants to free up some of their money soon through short-term CDs, but who also wants to lock in some long-term high APYs in anticipation of an impending drop in going rates.

Here is an example of a way to structure a CD ladder for someone who has $5,000 to invest:

• $1,000 into a one-year CD at 5.5 percent APY.
• $1,000 into a two-year CD at 5 percent APY.
• $1,000 into a three-year CD at 4.5 percent APY.
• $1,000 into a four-year CD at 4.4 percent APY.
• $1,000 into a five-year CD at 4.5 percent APY.

Benefit of a CD ladder: With this strategy, you can use the cash that’s freed up at each interval to continue investing in new CDs — or you can choose to invest that money elsewhere, based on going rates and your goals for the funds.

What to watch out for: A CD ladder that locks in some of your funds for the long term could end up preventing you from earning better rates in a rising-rate environment. And whether you’re devoting money to one CD or more, it’s important to have additional cash that’s easily accessible in the event of emergencies.

Alternatives to CDs

The advantage of CD rates is that they’re fixed – meaning you get to lock in the rate of return, regardless of what the Fed does – but there is a big disadvantage, too: You have to be comfortable locking up the money for an extended period of time. If that lack of immediate access scares you, you can still cash in on today’s rewarding environment with a high-yield savings account. The best high-yield savings accounts are paying rates that are nearly as high as CD rates, but you’ll also get the comfort of being able to withdraw the funds at any time. It’s also worth exploring money market accounts, which act as a cross between a checking account and a savings account. Today’s money market rates aren’t quite as impressive as high-yield savings accounts, but you’ll still manage a much higher return than a traditional savings account or a checking account.

If you’re willing to step outside the guaranteed return of CDs, take a look at low-risk investments such as Series I bonds, money market funds and dividend-paying stocks. These all come with additional considerations – some of which can include a loss of principal – but if you’re willing to expand your appetite for risk, you may be able to expand your reward.

Bottom line

While no one can predict future rate trends with certainty, a CD can allow you to lock in a high rate that you’ll no longer be able to get should rates start to fall. There’s a tradeoff, though: You need to be willing to lock up your money until the maturity date to take advantage of CD rates.

–Freelance writer David McMillin updated this article.