Certificates of deposit (CDs) offer high guaranteed returns in exchange for locking your money up at a bank or credit union for a term that you choose. While lackluster in previous years, CD rates have taken off in 2023, aided in large part by the Federal Reserve's continued interest rate hikes. These days, it's not rare to find a short-term CD paying out at a rate above 5%, with some paying out as high as 5.70%.
With only a few weeks left in 2023, many of these CDs look like good investments going into the new year. But are they? If you're thinking about investing in one soon, let's take a look at what we know.
Short-term CDs could make great investments, but don't ignore longer terms
Right now, you can find the highest rates on short-term CDs, like those ranging from three to 18 months. For example, on Raisin's CD marketplace, all the CDs paying above 5% are within that short-term range.
This isn't a coincidence. Rather, it reflects the expectation that interest rates will fall sometime in the future. Banks want to keep their CD rates competitive, but if they're paying 5.70% for five years, they could end up losing money.
If your goal is to earn interest at a high rate, a short-term CD could be a good investment, especially if you're hesitant to lock into a longer term. Now might even be the best time to build out a CD ladder, combining short and long terms to stretch out today's high rates for longer periods.
That said, I wouldn't ignore long-term CDs on the grounds that their rates are lower today. It's possible the Fed could start reversing course in 2024, hiking down rates to a more sustainable level. If that holds true, today's short term CDs could very well mature at a time when CD rates are much lower. You might lock into a 5.70% CD for six months, but a 4-year CD at 4.50% could freeze an elevated rate for a few years longer.
A no-penalty CD could make a good investment
A major problem with CDs is that they come with early withdrawal penalties. These penalties are often equal to a few months worth of interest, though some could be as high as six to 12 months. If you withdraw from your CD before your term is up, you'll pay this penalty, which could sometimes result in you losing money.
One way around this is to get a no-penalty CD. These CDs typically have a very brief no-withdrawal period, usually seven days or less, after which you can liquidate your CD account with no penalty. Traditionally, no-penalty CDs have low interest rates compared with regular CDs with the same term. But in today's high rate environment, you could easily pick up a no-penalty CD with an APY above 5%.
For example, Raisin has several no-penalty CDs on its marketplace. As of writing this, the highest paying no-penalty CD comes from Greenwood Credit Union with a 5.37% APY and 12-month term. Other close contenders include Technology Credit Union (5.36%, five-month term) and Mission Valley Bank (5.35%, three-month term).
What's great about these CDs is that you could break your contract to capture a different APY or longer term at a later date. Let's say, for instance, that the Fed indicates it's going to start lowering interest rates in 2024. You decide you're going to lock into a 4% rate on a 3-year CD. If you have your money tied up in a no-penalty CD, you could easily navigate out of the contract and open a new CD account. Likewise, if you have emergency savings, a no-penalty CD could help you earn at a higher interest rate, though I would recommend you consider a high-yield savings account first.
Will CD rates stay elevated in 2024?
CD rates are at a two-decade high, but they won't stay this high for much longer. Once the Fed feels confident inflation is under control, it won't be long before rates start to fall. I'd say if you're in the market for a CD, now is a great time to lock into one of today's top paying CDs. Take a look at different terms and see how much interest you could earn in 2024.
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