Best CD Accounts of 2021
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Certificates of deposit accounts can be good places to put some of your money to work for you. Interest rates on CDs are often higher than what’s offered with high-yield savings accounts. If you’re thinking about opening a CD account, there are several factors and types of accounts to consider before making any decisions.
Here’s a look at our top picks for the best CD accounts and how to pick the right one for your financial goals.
- What makes these some of the best CD accounts
- What is a CD account?
- How do CD accounts work?
- Where can you open a CD account?
- CD accounts vs. high-yield savings accounts
- How to pick the best CD account for you
- FAQs about CD accounts
What makes these some of the best CD accounts
One of the main reasons you might want to open a CD account is to earn interest on your money while keeping it safe. That’s why APY is one of the main things we look at when compiling our list of best CD accounts.
APY, or annual percentage yield, is the rate of interest your deposit will earn over the course of a year. CD rates are compounded at regular intervals, such as daily, monthly, or annually. The more often interest is compounded, the more and faster you earn.
When interest is compounded, that amount of money earned is added to the balance of the CD account. The next time interest is compounded, it will be based on this new higher balance: the original amount you deposited plus the previously earned interest.
|High-yield savings account with .80% APY compounded daily||CD with 1% APY compounded daily|
|Interest earned after one year||$16.06||$20.10|
|Interest earned after three years||$48.58||$60.91|
|Interest earned after five years||$81.62||$102.54|
What is a CD account?
A CD is a special type of interest-bearing savings account. When you open a CD account, you are committing a set amount of money to stay in that account for a specific period of time. In return for doing this, the bank or credit union offers to pay interest on your balance — often at a higher APY than with a high-yield savings account or money market account.
How do CD accounts work?
CD accounts may come with short or long fixed terms, and those terms will vary, depending on which financial institutions you’re researching. Short-term CDs can be for a period of months up to a full year term. Longer-term CDs can be for anywhere between one and five years. Banks and credit unions will often offer higher interest rates for longer-term CDs or larger deposit amounts.
When the full term of your CD is over, it has matured. You have some choices at this point. You can close the account and get back the money you originally deposited, plus the interest you earned. You can also roll over the funds into a new CD.
If you need to access your money before the CD matures, you can close out the account. However, you will usually incur a penalty fee for doing this. That’s why it’s important to choose a CD term that works with your financial situation.
The higher the APY offered with a CD, the better for you. Also take note of how often interest is compounded and your options for collecting interest when evaluating a CD account. Accounts that compound daily are ideal, but ones with monthly or annual schedules are also available. The more often interest is compounded, the faster and more your balance grows.
Some CDs will add the interest you earn directly to the account, increasing the amount of money for the next time interest is compounded. In this case, you would collect the full amount of interest payments earned when the CD matures.
Some CDs allow you to directly collect interest throughout the term, providing some passive income. When interest is paid out, it’s not added to the balance, and you lose that increase for the next time interest is compounded.
Where can you open a CD account?
You can open CDs with just about any financial institution that offers deposit accounts, such as your local bank. Online banks and credit unions often offer higher APYs for CDs than traditional banks. In the case of online banks, they have much lower overhead and can pass on that savings to customers in the form of APY rates.
Credit unions are nonprofit financial institutions and their account holders are part owners. The money credit unions earn is reinvested into the institution in the form of dividends and higher APY rates, among other things.
One of the advantages of opening a CD account with a bank or credit union is that most are federally insured, either through the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund. When you place your money in a CD covered under these programs, you can be assured that up to $250,000 is safe should the bank fail for some reason. You may also find CDs available through private brokers. However, these can be less secure investments, as they are likely not federally insured.
CD accounts vs. high-yield savings accounts
CD and high-yield savings accounts share many similarities. Both are secure places to keep your money and earn interest. They are federally insured when opened at an FDIC- or NCUSIF-member institution. They also offer higher rates of interest than standard savings accounts.
A high-yield savings account allows you to access your money whenever you need it. You can deposit and withdraw funds and keep your bank account open for as long as you like. CDs don’t give you that kind of flexibility. When you open a CD, that initial deposit is the only transaction you make. That money is committed to the CD until the term is up. You can’t add funds, and you typically can’t withdraw funds without closing the account and paying an early withdrawal penalty.
The best savings accounts are a good option for emergency funds or saving up for a shorter-term goal, like a vacation. You can add to them on a regular basis and take out what you need when circumstances are right. CDs are a good option for growing funds that are earmarked for use well into the future or for balances large enough that collecting the interest earns passive income for you.
How to pick the best CD account for you
If a CD is starting to sound like the right kind of account for you, you’re on the right track. Your next step should be shopping around for one that fits your situation perfectly. Every bank and credit union offers different things in their CDs, so it’s important you research your options before making any decisions. Here are some specifics to look out for.
Some CDs don’t have a minimum deposit amount, but others do. Banks may offer higher APYs for larger deposits. Ask yourself how much money can you afford to keep in a CD for however long the term is and whether it meets the minimum deposit requirements for the account you’re researching.
CD term length
You can invest in a CD for a matter of months or several years, depending on your savings goals. Longer terms often come with higher APYs to entice customers to open new CDs. It’s important to consider how long you can afford to have your money tied up in an account you can’t withdraw from. Look for CDs within a range of time frames and weigh the benefits of each and whether the amount of interest you will earn during the term fits your needs. A one year CD might be right for some, while a five year CD could be the best option for others.
Another option to consider is building a CD ladder, which involves investing portions of your money in CD accounts with different term lengths at one time. For instance, you could purchase a six-month CD, a one year CD, and a five year CD. CD laddering can be beneficial because you're still earning interest, but all of your money isn't tied up in a long-term CD for several years.
Your main goal in opening a CD is to earn interest. In this case, you want to look at the APY offered. As discussed above, APY is the percent of interest earned over a year, taking into consideration how often interest is compounded.
When a bank compounds interest, it applies a fraction of the APY rate to the current amount in an account and adds that amount to the total balance. Each time interest is compounded, the balance increases and you earn interest on the money you initially deposited plus the interest that has been added to your account.
The more often APY is compounded, the faster your balance will grow. CDs that compound interest daily will earn more than ones that compound monthly. This is because the balance of the account is increasing every day, earning interest on an incrementally growing amount of money. When interest is compounded monthly, the balance increases less frequently, so a lower amount of interest is earned.
When shopping for a CD, consider looking for ones with the best rates and frequent compounding.
The CD accounts listed here are FinanceBuzz partners. Although these CD accounts offer favorable rates and terms, we did not include all accounts in this category.
FAQs about CD accounts
Are CD accounts worth it?
Whether putting your money in a CD account is worth it is really up to you to decide. CDs can offer higher interest rates than high-yield savings accounts. However, those rates can still be much lower than you might earn if you invest in stocks, but investing in the stock market definitely comes with more risk.
Think about what you want your money to do for you and find out if a CD can deliver what you need. For example, placing your money in a CD might be a good temporary money move when the market is volatile. You will likely not earn as much in the short-term, but you know your money is earning something and is in a more secure place. When the market stabilizes, you could take the funds from your matured CD and put it back into higher-earning investments.
Depending on all of these factors, you may find opening a CD is worth the time and effort or you may find it’s not the right fit. Only you can make that call.
What types of CD accounts are available?
As you're shopping around for a CD, you may encounter the following types. Ensure that you research the different options to find the right CD option to suit your needs:
- Short-term CDs
- Long-term CDs
- Brokered CDs
- Bank CDs
- IRA CDs
- Callable CDs
- Bump-up CDs
- Jumbo CDs
Can you lose money in a CD account?
CDs are generally considered to be a safe investment if your account is with an institution that has NCUA or FDIC insurance, which guarantees deposits up to $250,000. When the CD matures, you will get back the full amount of money you deposited. You’ll also collect interest, which may be paid at regular intervals or in one lump sum when the CD matures.
You may get a variable or fixed interest rate, but even if the rate changes at some point, you will not lose money. If you close the CD before it matures, you may be charged a penalty fee.
What happens when a CD reaches its maturity date?
In short, you get back the money you deposited into the CD account, plus any interest that has not already been paid.
How much money should you put in a CD account?
Some institutions have a minimum amount for opening a CD, but you can usually find a CD for any amount of money you want to earn interest from. Many of the best banks offer higher interest rates for CDs funded with larger amounts of money and/or longer terms, so that may influence your decision of how much to put in a CD account.
What’s the difference between the FDIC and the NCUA?
FDIC insurance is insurance provided to banks by the federal government. It guarantees deposits up to $250,000 per customer for qualified accounts. The NCUA provides the same type of insurance, but it’s for credit unions instead of banks. Institutions that are FDIC insured or have NCUA coverage are generally considered safe places to keep your money.