5.00% CD or 5.00% Reward Checking Account?

It has been a while since I've seen a 5% CD, but thanks to PenFed, we are seeing them again. However, as I mentioned in this PenFed review, this 5% CD is only a promo that's only available to some PenFed members. Also, this CD has a very long term of 10 years. So I wouldn't call this a hot deal, but at least it is a 5% CD that is available to some. I was told by a PenFed rep yesterday that these new 10-year CDs should be available to all PenFed members starting in January. However, the rate is likely to be under 5%, but hopefully, it'll be higher than their 7-year CD rate which has always been very competitive. The rate is currently 3.75% APY (see review).

Long-term CDs may seem very unappealing in this low interest rate environment. There's the concern that you're locking in your money for a very long time when we may see rates shoot up in a couple of years. An important consideration is the early withdrawal penalty of the CD, and as I showed in the PenFed post, a long-term CD closed early with a penalty can be a better deal than shorter-term CDs closed at maturity.

I thought it would be interesting to see what readers think would be the best deal for their money if you had a choice between a 5% CD like what PenFed is offering (to some members) or a 5% reward checking account. PenFed is not offering a reward checking account, but there are still some institutions offering reward checking with yields of 5% or higher. However, they are only local deals, so only a few lucky people have access to them. We currently list 12 banks and credit unions offering reward checking accounts with yields of at least 5.00% APY and with balance caps of $25K to $30K. Please refer to our reward checking table to see if these institutions are near where you live (select "filter accounts" to select your state).

With most internet savings accounts having yields under 1.50%, the 3% to 5% yields offered by most reward checking accounts have been very helpful for savers. However, reward checking yields and balance caps have fallen over the last year, and they may fall more in the coming years as banks lose revenue due to new regulation that reduces overdraft fees and debit card interchange fees. As with any liquid account, there's no guarantee that the rate will hold. So that's an important downside to consider with reward checking accounts as compared with CDs.

So if you had a choice between a 5% 10-year CD or a 5% reward checking account, which would you choose? The 10-year early withdrawal penalty is one year of interest. Assume the 5% reward checking account has a $25K balance cap with the typical reward checking requirements. I've also included the other two PenFed promo CDs in the poll: 3.50% APY 5-year CD with a 6-month penalty and a 4.25% APY 7-year CD with a 12-month penalty.