One silver lining of the high inflation over the last few years has been high rates on savings products, including certificates of deposit (CDs). But with inflation cooling, rates are already starting to fall. Many experts expect even bigger drops as we move into 2025.
This has left many savers scrambling to lock in a competitive CD rate before they’re gone. But it’s important to give this decision some careful thought. Here are two key reasons you might regret a decision to hastily open a CD right now.
1. You’ll pay a penalty for early withdrawals
Most CDs have early withdrawal penalties to discourage people from taking their money out before the maturity date. This is anywhere from a few weeks to several years in the future, depending on the CD you choose. The penalty is typically equal to several months of interest payments with earlier withdrawals resulting in larger penalties.
Generally, you can’t lose your principal unless you withdraw your money shortly after opening the CD. But if you’re worried about costing yourself any money, it’s probably best not to open a CD right now. Or you could opt for a CD with a shorter term.
Our Picks for the Best High-Yield Savings Accounts of 2024
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American Express® High Yield Savings APY 4.25%
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APY 4.25%
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Min. to earn $1 |
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UFB Portfolio Savings Account 
APY 5.15%
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APY 5.15%
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Min. to earn $0 |
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Western Alliance Bank High-Yield Savings Premier 
APY 5.31%
Min. to earn $500 to open, $0.01 for max APY
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APY 5.31%
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Min. to earn $500 to open, $0.01 for max APY |
You could also consider a no-penalty CD instead. These only assess early withdrawal penalties during the first six or seven days after account opening. After that, you can make penalty-free withdrawals, though you’ll lose out on future interest earnings if you do. You’ll have to withdraw your cash all at once, just like with a traditional CD.
If you’re looking for a place to store your emergency savings or cash you plan to spend within the next few months, a high-yield savings account is a better option. Your interest rate isn’t guaranteed, but you can withdraw your cash whenever you need to.
2. CDs probably won’t offer the best returns over the long term
A CD can be a good choice for those who expect to need their money in the next few years and want to put their funds to work without risking it in the stock market. But it’s not a great option for long-term investors, including those saving for retirement.
Even the best CD rates — around 5.00% APY for a one-year term right now — are well under the average stock market return over the long term. The S&P 500 has had a 12.6% average annual return over the last 15 years.
To give you a comparison, if you invested $1,000 in an S&P 500 index fund and it earned 12.6% annually for the next decade, you’d have $3,726, minus a small amount for fees. If you invested in a CD with a 5.00% APY, you’d only have $1,629 after 10 years. And that’s not even realistic because CD rates probably aren’t going to stay this high for much longer.
If you don’t think you’ll spend your money in the next five to seven years, you’re probably better off investing it. You can do this in a retirement account or in a taxable brokerage account. Retirement accounts offer valuable tax breaks, but they also restrict access to your funds under age 59 1/2. So a taxable brokerage account might be a better fit if you want to tap your funds penalty-free sooner.
CDs have their place, but since they require you to lock your money away for a period, opening one isn’t a decision to make lightly. Evaluate all your options for your money carefully before deciding what’s right for you.
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