It's a pretty good time to open a CD. CD rates are up following the Federal Reserve's recent stretch of interest rate hikes. And while you could take advantage by putting your money into a regular savings account, the rate you earn on your money in one of those accounts can fluctuate with market conditions. The upside of a CD is that your interest rate is guaranteed for your CD's entire term.
Plus, because CDs require a commitment on your part, they generally pay more than savings accounts. So that, too, could work in your favor.
You may be interested in a CD but be torn between a 6-month term versus a 12-month term. That's understandable. The latter requires a much longer commitment than the former. If you're not sure which option to choose, ask yourself these questions.
1. Which term offers a better rate?
A 12-month CD will often come with a higher interest rate than a 6-month CD, though this isn't always a given. Right now, though, many banks are offering a better rate for a 12-month CD. So if your goal is to earn the maximum amount of interest, then tying your money up for a year may be the right choice.
At Capital One, for example, you can earn a 4.25% APY on a 6-month CD. With a 12-month CD, you're looking at an APY of 5.00%. If you're depositing $5,000, your 6-month CD will give you about $109 in interest after half a year. With a 12-month CD, you're looking at a little over $131 in interest at the 6-month mark.
2. Which term comes with a harsher penalty for an early withdrawal?
You might open your CD with the intent to keep your money in the bank for the duration of its term. But sometimes, things happen. If you end up needing cash in a pinch beyond what your emergency fund can cover, then you might need to tap your CD early, even if that results in a penalty.
Before you commit to a 6-month CD over a 12-month CD, you may want to see if there's a difference in penalties. And that will hinge on your bank.
At Capital One, there's no difference between cashing out a 6-month CD early versus a 12-month CD. You'll be looking at a penalty of three months' worth of interest either way. But other banks might have a different structure, so it could pay to do some research.
3. How much flexibility do I need with my cash?
You may feel uneasy with the idea of tying up your money for a longer period. If you would rather have that money free up sooner for your own peace of mind, that may be reason enough to look at a 6-month CD over a 12-month CD.
Remember, too, that it's hard to say with certainty what the economy has in store in 2024. Things are stable now, but if the situation shifts, you may not feel comfortable with the idea of having to wait so long to access your cash. And it's perfectly OK to base your choice on your comfort level.
All told, opening a CD right now could put some easy interest earnings in your pocket. Run through these questions if you can't decide whether a 6-month or 12-month term is right for you.
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FAQs
While 12-month CDs can be good for those who think interest rates will fall soon, some savers and investors might choose 6-month CDs to try to earn a high interest rate for now and then re-evaluate the situation six months later.
Is it better to do a 6-month or 12 month CD? ›
So if your goal is to earn the maximum amount of interest, then tying your money up for a year may be the right choice. At Capital One, for example, you can earn a 4.25% APY on a 6-month CD. With a 12-month CD, you're looking at an APY of 5.00%.
Should I take CD interest monthly or annually? ›
That's up to each issuer. In practice, however, most CDs compound either daily or monthly. The more frequent the compounding, the more interest your interest will earn. The frequency with which your CD compounds is reflected in the annual percentage yield (APY) that the CD's issuer promises you when you buy a CD.
What is the best duration for a CD? ›
Traditionally, in your typical ladder, five-year CDs have a higher yield than one-year CDs. But these days, you're likely to see a CD with a term of around six months to 18 months will likely have the highest yield in your ladder.
What is considered a good 6-month CD rate right now? ›
Compare the best 6-month CDs
| INSTITUTION | STAR RATING | APY ON 6-MONTH CDs |
|---|
| Popular Direct certificates of deposit | 4.81 | 5.30% |
| Marcus by Goldman Sachs High-Yield certificates of deposit | 4.80 | 5.10% |
| TAB Bank certificates of deposit | 4.77 | 0.00% |
| Bask Bank Certificates of Deposit | 4.76 | 5.15% |
7 more rowsUse Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
How to avoid paying taxes on CD interest? ›
How to avoid taxes on CD interest. One way to postpone being taxed on CDs is to put them in a tax-deferred individual retirement account (IRA) or 401(k). As long as money placed in a traditional IRA is below the annual contribution limit, interest you earn may be tax deductible.
Is a 3 month CD worth it? ›
Is a 3-month CD worth it? Yes, a three-month CD can be worth it if you're looking for a safe, FDIC-insured account that earns guaranteed interest on money you'd otherwise leave untouched in a checking or savings account.
How much does a $100,000 CD make in a year? ›
1-year CD returns on $100,000
At 4.5%: $4,500, for in a total balance of $104,500 at the end of the term. At 5.0%: $5,000, for in a total balance of $105,000 at the end of the term.
"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."
What is better, a CD or high-yield savings account? ›
If your goal is to lock in a high rate of interest on funds you don't need to access for a period of time, a CD might be your best option. However, a high-yield savings account may be the better choice if you want to earn solid interest on your savings while still keeping the money relatively accessible.
Is a 2 year CD worth it? ›
A two-year certificate of deposit (CD) can be a useful financial tool for those looking to secure a higher interest rate on their savings without committing to locking up their money long term. It may also pay a higher rate of return than a high-yield savings account.
Is a 6 month or 12 month CD better? ›
Both of these terms carry higher interest rates today compared to longer-term CDs or high-yield savings accounts. If you want the absolute highest CD rate, you may earn more with a one-year CD — though the difference is only slight.
Where can I get 7% interest on my money? ›
7% Interest Savings Accounts: What You Need To Know
- As of May 2024, no banks are offering 7% interest rates on savings accounts.
- Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Highest current CD rates (overall)
| Institution name | APY | Term length |
|---|
| LendingClub Bank | 5.00% | 18 months |
| Newtek Bank | 5.00% | 18 months |
| My eBanc | 5.00% | 18 months |
| Western Alliance Bank | 5.00% | 3 months |
31 more rows2 days ago
One benefit to opening a long-term CD is that you'll have a fixed interest rate for a longer timeframe than a short-term CD. This means you'll earn more interest on your account because you'll have it locked in longer. You also won't have to worry as much about CD rate fluctuations.
What is the benefit of a 6 month CD? ›
You can access your cash after six months without the risk of an early withdrawal penalty. You may get a higher interest rate than a traditional savings account. Some of the best six-month CDs offer rates that are significantly higher than savings accounts at traditional, brick-and-mortar banks and credit unions.
How much can you make off of a 6 month CD? ›
The best six-month certificate of deposit (CD) rate is currently 5.50% annual percentage yield (APY), while the national average rate is 1.79%. With rates expected to fall later in the year, the experts we interviewed said now is the time to lock in high yields on CDs.
What is a benefit of a 12 month CD? ›
Offers higher interest rates than traditional savings accounts. By committing your funds for a year, you can potentially earn more interest than you would if you left the money in a traditional savings account at a brick-and-mortar bank.
