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3 ways to take advantage of high CD rates

Yields on many deposit accounts are currently the highest they’ve been in years, and various savings accounts and certificates of deposit (CDs) are even earning yields that are outpacing inflation. Many savers are seizing the day by putting money into CDs with high guaranteed rates while yields remain high.

The reason annual percentage yields (APYs) on many deposit accounts have risen steadily is the Federal Reserve has gradually hiked its key benchmark interest rate to a 22-year high, in an effort to combat inflation. When the Fed raises rates, competitive banks also tend to nudge their rates higher.

While the Fed has indicated it may hike rates once more in 2023, most market participants assume this will not happen.

At this time, no one knows for certain whether another Fed rate hike will occur or when rates may start to come down. However, since standard CD APYs remain fixed for their entire term, locking in a high yield now could be beneficial in the event rates begin to drop.

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 rock-bottom APYs as low as 0.01 percent.

National average rates are somewhat higher, with the current average APY for one-year CDs being 1.74 percent, according to Bankrate data. However, various CDs earn more than three times that national average, with the top one-year CD earning a 5.75 percent APY. One of the best sources of such high rates is online-only banks, many of which offer them to lure customers away from long-established banks.

Credit unions are another common source of high yields on CDs (which they call share certificates) and other deposit accounts. These not-for-profit institutions are owned by their members, so they’re able to provide better saving and lending rates.

— GREG MCBRIDE, CFA | BANKRATE CHIEF FINANCIAL ANALYST

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:

Type of 1-year CD

Typical APY

Interest on $5,000 after 1 year

Total value of CD with $5,000 opening deposit after 1 year

CD that pays a competitive rate

5.50%

$275

$5,275

CD that pays the national average

1.74%

$87

$5,087

CD from a big brick-and-mortar bank

0.03%

$1.50

$5,001.50

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:

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.

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. Today’s high-rate environment makes deposit accounts — such as savings accounts, money market accounts and CDs — a favorable option to reap the benefits of compound interest. Of these three, a CD is the only choice that provides a fixed rate of return — although it’s also important to consider your goals for the money and how accessible you need the funds to be.

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