CDs vs. High-Yield Savings Accounts: Which Should I Choose?

Choosing between a CD versus high-yield savings account often comes down to how soon you need to access your funds.

Both a CD and savings account can be great places to earn above-average rates on your money, but the level of access you have to those funds will differ depending on which you use. If you need your funds readily available, a high-yield savings account is often better. But if you can afford to lock up your funds, you may be able to get a higher rate with a CD.

What is a certificate of deposit (CD)?

A certificate of deposit, or CD, is a type of savings account that holds your money for a predetermined length of time. You may be charged a penalty if you withdraw your funds before the end of the CD term.

In return for locking up your money, the bank or credit union that issued the CD will typically pay you a fixed interest rate that's often higher than you could earn on a regular savings account. Some CDs may have variable interest rates, however, so be sure to read the disclosure statement before purchasing.

CD terms can range from a few months to five years or more. They are insured for up to $250,000 by the Federal Deposit Insurance Corp. (FDIC) if issued by a covered bank, or by the National Credit Union Administration (NCUA) if offered by a covered credit union.

What is a high-yield savings account?

A high-yield savings account is a type of savings account that earns more interest than your standard savings account. However, high-yield accounts often come with greater restrictions and requirements than traditional savings accounts.

There may be limits on how much or how often you can withdraw funds, such as only up to six transactions per month. While the Federal Reserve dropped the legal requirement to limit withdrawals, banks are still allowed to impose their own limits if they choose. There may also be a minimum balance requirement. Failure to meet these requirements could mean you will be charged a fee.

Unlike CDs, the interest rate on high-yield savings accounts is variable, i.e., it can change at any time. Banks and credit unions set their own interest rates on savings accounts, but they're often based on the federal funds rate.

You can open a high-yield savings account at many banks and credit unions. Deposits into such an account are typically insured for up to $250,000 by the FDIC at member banks or the NCUA at member credit unions.

CDs vs. high-yield savings at a glance

When is a CD a good choice?

A CD may be a better choice than a savings account if you're comfortable locking your funds up for the stated term — especially if you think interest rates will drop in the near future.

Because you won't have access to your funds, make sure you're getting a good rate. CDs don't always pay more than high-yield savings accounts.

Similarly, pay attention to whether the CD offers a fixed or variable APY. Fixed rates can be beneficial if you think interest rates will go down in the near future because they allow you to lock in the current higher rates. However, if interest rates rise after you open a CD, you could be stuck earning below-market rates until your CD matures.

Check all CDs terms and conditions beforehand so you know what fees and penalties you may face. You'll also want to ensure you understand the renewal terms. Some CDs automatically renew at the maturity dates if you don't withdraw your funds.

Lastly, confirm the bank or credit union issuing the CD is FDIC or NCUA insured so you know your funds are protected.

When is a high-yield savings account a good choice?

A high-yield savings account is often a better choice for funds you may need to access periodically. Unlike CDs, you can withdraw your funds without penalty from a high-yield savings account within the monthly transaction limits. This makes high-yield savings accounts a better option for emergency funds that you may need to access at any time.

Because high-yield savings accounts offer variable interest rates that fluctuate with market conditions, they can also be the best choice in a rising rate environment. The rate on your high-yield account will likely rise with prevailing market interest rates. Rates can also vary widely from institution to institution. Make sure you take time to shop around so you know you're getting the best APY.

Be sure to read your deposit agreement closely before opening an account because every account has different fees, restrictions and minimums. Some banks even charge fees for closing your account.

As with CDs, make sure any bank or credit union you choose is FDIC or NCUA insured to protect your funds.

Pros and cons of CDs vs. high-yield savings

CDs

High-yield savings account

How to open a CD or savings account

The process of opening a CD versus a savings account begins similarly, but each has different considerations.

Follow these steps to open a CD:

• Choose your desired term. Before you begin shopping rates, you'll want to decide how long you're willing to lock up your funds. This will help narrow the playing field of potential CD providers.
• Compare issuers. Once you know the CD term you want, you can begin comparing rates and fees for the same CD term lengths among providers. Most publish their rates online, so comparing is often fairly simple.
• Open a CD account. Your chosen provider will walk you through how to open your CD account. Often this can be done online, but you may also be able to open a CD in-person at a bank or credit union branch.
• Fund your CD. The last step in the account opening process is to fund your CD. The simplest way is to transfer funds online from an existing checking or savings account, but make sure there are no fees for funding the account through other means, such as a wire transfer. You may also be able to fund your CD with a paper check.
• Note the maturity date. Lastly, make sure you add your CD's maturity date to your calendar. Many institutions will notify you when your CD is about to mature, but it's always a good idea to keep track of this yourself, too, just in case.

Follow these steps to open a savings account:

• Compare providers. Start by comparing the rates, fees and account minimums at various financial institutions. You may find the best savings rates at online-only banks, but this isn't always the case.
• Open an account. Your chosen provider will walk you through how to open your savings account. Often this can be done online, but you may also be able to open an account in person at a brick-and-mortar bank or credit union branch.
• Fund your account. Depending on the institution you chose, you may be able to fund your savings account online or with a paper check. Just watch out for any fees associated with your chosen funding method.

Alternatives to CDs or high-yield savings

CDs and high-yield savings accounts aren't the only options for your savings. Other alternatives to consider include:

• Money market accounts. These accounts are similar to high-yield savings accounts, but may pay even higher rates. However, money market accounts may have a higher minimum balance required. Unlike CDs, you don't need to lock up your funds to earn a high rate.
• High-yield checking account. These accounts often provide high APYs along with free checking and a debit card. There may be requirements to earn the high rate, such as making a specified number of debit card transactions each month. There may also be a cap on the amount of funds that earn the high stated rate.
• Paying off debt. Sometimes the best use of your extra savings is paying off debt. This is especially true if your debt carries a higher interest rate than you could earn by putting it into a CD or other high-yield account.

Ultimately, you have many options for where to keep your funds. Choosing between a CD versus high-yield savings account usually comes down to how much access you need to your funds and which account is paying the better rate. As always, do your due diligence before committing your hard-earned savings to any account.