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How to choose the right CD
For starters, decide on what CD term you need. If you’ve got extra cash and don’t mind putting it out of sight for a few years, consider a 5-year CD. They tend to have the highest rates, so you’re almost sure to get a good investment for your patience. If you don’t want to lock up funds for that long, fall back on a 3- or 4-year CD instead.
You should have a plan for the money beforehand. If you’re just saving for the sake of savings, then go ahead and park it for years. But if you plan to buy a car within the next year or two, perhaps stick to a shorter, 1-year term.
It is always a bit of a gamble to commit to CDs, wondering whether you’re going to miss out on potentially higher interest rates. But if you wait too long, you can miss peak rates. It can help to research historical CD rates to see whether today’s rates are trending toward an increase or a decline. You can also monitor the federal funds rate, which largely dictates the trajectory of CD rates.
After your CD term is sorted, it’s tempting to run straight for the highest rate. But you need to check a CD’s minimum deposit before jumping right in. CD minimum deposits run the gamut, with certain online banks not requiring any amount, while other institutions require $25,000 or even $100,000. Some may require a low opening deposit in general, but require an even higher balance to earn their best rate. Make sure you can responsibly meet the minimum deposit (without needing that money before the CD expires), so you don’t end up surprised by the requirement when applying.
Instead of listing the best CD rates as of today, this list includes the top banks that have a history of offering the best CDs. These are the institutions that may not be offering the highest CD rates today, but based on their history, they are most likely to be offering the best CD rates over the long run. This increases the odds that you’ll want to stay with the institution when your CDs mature.
There are more factors to consider than rates when choosing the best institutions for CD investors. Early withdrawal penalties (EWPs) should be a very important consideration. Not only are EWPs important if you need early access to the principal, but they’re important in changing interest rate environments. If interest rates should ever start to rise at a fast pace, small EWPs will allow CD investors to move their money to higher-rate CDs.
A bank or credit union may offer the highest rates with the lowest EWPs, but you may not be able to take advantage of the CDs if the institution doesn’t offer features that you need such as the ability to make regular interest payments or offering trust accounts.
Some features may not be deal breakers, but they can save you time and money. A feature that aids in CD management, such as online software that allows you to add, change or remove beneficiaries, can save you time from having to mail in a form. A feature that allows you to receive CD funds via ACH can avoid the possibility of losing a check in the mail or losing interest while you wait for the check.
The following five picks take into account multiple CD features in addition to the institutions’ CD rate history and EWPs. The institutions that scored high on all three are the ones that made the list. You may be able to find a higher CD rate today at another institution, but that may not be the best choice for today or for your future CDs.
#1 First Internet Bank
First Internet Bank ranks high on my list of institutions with the best CDs due to its long history of offering top rates on terms from three months to 60 months. This is important for those who plan to use the bank for CD ladders over the long run.
In addition to competitive rates, First Internet Bank makes it easy to open, close and manage CD accounts. CDs can be opened online and funded with an ACH electronic transfer.
Interest can be paid out monthly instead of being added back to the CD. One partial early withdrawal of principal is allowed without the CD account being closed. An early withdrawal penalty applies on the amount withdrawn.
At maturity, there’s a 10-day grace period which is a typical length. When the CD is closed, the funds can be received by check or wire transfer. An ACH transfer is currently not an option which is a shortcoming. An internal transfer to a checking, savings or money market account is also an option.
The early withdrawal penalties (EWPs) of First Internet Bank CDs are on the high side which is a shortcoming. As examples, the 12-month CD EWP is 180 days of interest, and the 60-month CD EWP is 360 days of interest.
One or more beneficiaries can be designated on CD accounts, and social security numbers are not required for the beneficiaries. CD can also be opened as a trust account.
IRA CDs are available with the same rates and terms as the regular CDs.
#2 Colorado Federal Savings Bank
Colorado Federal Savings Bank ranks high on my list of institutions with the best CDs due to its long history of offering top rates on terms from one month to 60 months. This is important for those who plan to use the bank for CD ladders over the long run.
In addition to competitive rates, Colorado Federal Savings Bank makes it easy to open, close and manage CD accounts. CDs must be opened online and funded with an ACH electronic transfer or internal transfer. Checks and wire transfers are not accepted.
Interest can be paid out monthly instead of being added back to the CD. Partial early withdrawals of principal are allowed without the CD account being closed. An early withdrawal penalty applies on the amount withdrawn.
At maturity, there’s a 10-day grace period which is a typical length. When the CD is closed, the funds will be sent by an ACH electronic transfer to the original external account that was used to fund the CD. Colorado Federal Savings Bank does not issue checks when accounts are closed. This lack of flexibility of funding a CD and receiving the funds from a CD is a slight shortcoming.
Another strong point of the CDs is early withdrawal penalties (EWPs) that are on the low side. As examples, the 12-month CD EWP is three months of interest, and the 60-month CD EWP is six months of interest.
Up to five payable-on-death (POD) beneficiaries can be designated on CD accounts. Social security number of the beneficiaries are required. CDs cannot be opened as trust accounts.
IRA CDs are not available.
#3 Connexus Credit Union
Connexus Credit Union ranks high on my list of institutions with the best CDs due to its long history of offering top rates on terms from 12 to 60 months. This is important for those who plan to use the credit union for CD ladders over the long run.
In addition to competitive rates, Connexus makes it easy to open, close and manage Certificate accounts. Certificates can be opened online and funded with an ACH electronic transfer, a wire transfer, or a check.
Interest can be paid out quarterly instead of being added back to the Certificate. Partial early withdrawals of principal are allowed. Early withdrawal penalty will apply only on the amount withdrawn.
At maturity, there’s a 10-day grace period which is a typical length. When the Certificate is closed, a check can be issued at no charge or funds can be transferred into another Connexus account. An outgoing ACH transfer is possible, but there are significant dollar limits and fees.
The early withdrawal penalties (EWP) of Connexus 60-month Certificate is on the high side which is a shortcoming. The 60-month Certificate EWP is 365 days of interest. However, the EWP for the 12-month Certificate is 90 days of interest, which is on the low side. Certificates with terms between 12 months and 60 months have an EWP of 180 days of interest, which is neither low nor high.
One or more beneficiaries can be designated on Certificate accounts, and social security numbers are not required for the beneficiaries. Certificates can also be opened as trust accounts.
IRA Certificates are available with the same rates and terms as the Share Certificates.
#4 Ally Bank
Ally Bank ranks high on my list of institutions with the best CDs due to its long history of offering competitive rates on terms from 12 to 60 months. This is important for those who plan to use the bank for CD ladders over the long run. CDs with terms of three, six and nine months are also available, but these rates have been less competitive than the longer-term CDs.
Ally Bank also offers non-standard CDs which include an 11-month No Penalty CD and the 24-month and 48-month Raise Your Rate CDs. The 11-month No Penalty CD allows customers to obtain rates higher than savings accounts with much more liquidity than standard CDs.
In addition to competitive rates, Ally Bank makes it easy to open, close and manage CD accounts. This can be done by phone or by online software.
CDs can be opened online, by phone, or by mail. CDs can be funded by an ACH transfer from an account at another institution, by an internal transfer from an Ally Bank account, by mailing a check, by mobile check deposit, or by wire transfer.
Instead of being added back to the CD, interest can be paid out monthly, quarterly, semi-annually or annually. Online software allows the customer to easily configure interest payments.
One shortcoming at Ally Bank is that partial early withdrawals of principal are not allowed. An early withdrawal of principal will force closure of the CD.
At maturity, there’s a 10-day grace period which is a typical length. When the CD is closed, the funds can be transferred internally to another Ally account or transferred by ACH to an account at another bank. In addition, a check can be mailed.
Another strong point of the CDs is early withdrawal penalties (EWPs) that are on the low side. As examples, the 12-month CD EWP is 60 days of interest, and the 60-month CD EWP is 150 days of interest.
Up to ten beneficiaries can be designated on CD accounts. Social security number of the beneficiary is not required. Beneficiary designations can be done in the application or by using the online software after the account has been opened. CDs can also be opened as trust accounts.
Except for the 11-month No Penalty CD, IRA CDs are available with the same rates and terms as the regular CDs.
#5 Live Oak Bank
Live Oak Bank ranks high on my list of institutions with the best CDs due to its history of offering top rates on terms from six to 60 months. This is important for those who plan to use the bank for CD ladders over the long run.
In addition to competitive rates, Live Oak Bank makes it easy to open, close and manage CD accounts. CDs must be opened online and funded with an ACH electronic transfer.
Interest can be paid out monthly instead of being added back to the CD. Partial early withdrawals of principal are allowed without the CD account being closed. An early withdrawal penalty applies on the amount withdrawn.
At maturity, there’s a 10-day grace period which is a typical length. When the CD is closed, the funds can be distributed through an ACH transfer, a wire transfer, or a certified check.
Another strong point of the CDs is early withdrawal penalties (EWPs) that are on the low side. As examples, the 12-month CD EWP is 90 days of interest, and the 60-month CD EWP is 180 days of interest.
Up to five payable-on-death (POD) beneficiaries can be designated on CD accounts. Beneficiaries can be US citizens, a charity, a trust, or a non-profit organization. CDs cannot be opened as trust accounts.
IRA CDs are not available.
How do CDs work?
What is a CD?
Certificates of deposit are time deposit accounts that operate on a deadline. Each CD has a term, ranging between one month and 120 months. The CD earns interest from the moment it’s funded until the term comes to an end, which is known as the CD’s maturity date. Generally, the interest rate is fixed until maturity.
When you open your account, you are generally required to meet a minimum deposit requirement. This can range from $0 to more than $100,000, so be sure to check the issuer’s requirements before you commit.
While you wait for your CD to mature, you cannot touch the initial deposit amount, called the principal. Some issuers let you cash out interest payments to a separate account, but any withdrawals of the principal before maturity triggers an early withdrawal penalty, which can cost you some or even all of your interest earnings. It’s best to use CDs when you know you won’t need to touch your funds for a while.
Types of CDs
The standard or traditional CD has a fixed interest rate that lasts for a specific term. Any early withdrawal of the principal will result in an early withdrawal penalty.
No-penalty CDs have a fixed interest rate and a specific term, but penalty-free early withdrawals are allowed during the term. Most no-penalty CDs allow the penalty-free early withdrawal after six days from account funding. However, this can vary.
Bump-up CDs provide the CD holder the option at one or more times during the term to bump-up the interest rate of the CD to the rate currently being offered on new bump-up CDs with the same term. This allows the CD holder to benefit from rising rates. If the CD holder chooses to bump up the rate, the higher rate will typically take effect from the date the request is made until the CD matures.
Add-on CDs provide the CD holder the option to make additional deposits to the CD before maturity. The standard CD only allows deposits to be made when the CD is opened and at maturity if the CD is renewed. An add-on CD may have limitations on how many times add-on deposits can be made. It’s typical to be limited to one or two times during the term. Also, add-on CDs may have limitations on the size of the add-on deposit. Sometimes, the add-on deposit is limited to the size of the initial principal.
Variable-rate CDs don’t have a fixed interest rate that lasts for the entire term. The rate can vary based on some index such as the Prime Rate, and the rate can vary in specific ways such as the start of a new month.
Share certificate is the name that many credit unions use to describe their CDs. The label “time deposit” is also sometimes used to identify a CD by both banks and credit unions.
CD specials are limited-time promotional CDs that banks and credit unions offer to attract more deposits. They often have non-standard term lengths (such as 13 months) and higher minimum deposit requirements than the standard CDs. At maturity, the Special CDs will often automatically renew into standard CDs with similar maturities and the standard rates. CD specials often require new money which is defined as funds that are not currently on deposit with the institution.
Brokered CDs are CDs that are offered at brokerage firms. Banks issue brokered CDs as a large block of deposits. Brokerage firms sell small parts of that block to its customers. Brokerage customers who want to access their brokered CDs before maturity will typically have to sell their brokerage CDs on a secondary market that is managed by the brokerage firm. There is no early withdrawal penalty, but the CD may have to be sold for less than the original principal, especially if interest rates have risen.
Direct CDs are CDs that are offered directly by banks or credit unions. The direct CD name is used to differentiate the CD from a brokered CD that is offered indirectly from a bank through a brokerage firm.
IRA CDs are CDs held inside of an IRA at banks, credit unions or brokerage firms. They can be any of the above CD types. When held inside of an IRA, interest earned receives favorable tax treatment as defined by the IRS. IRS rules for IRAs can limit the amount that can be contributed to IRA CDs and can restrict how CD funds can be transferred to other institutions.
Should I open a CD?
CDs are great savings options for many scenarios. They can be the right place to park any savings overflows you might have. If you’ve already maxed out your savings accounts, whether for FDIC insurance reasons or annual retirement contribution limits, you can stash extra funds in a CD. The rate that you open the account at is guaranteed for the entirety of the term, so you don’t have to worry about losing out to inflation or market downturns.
CDs allow you to take advantage of a high-rate climate and lock in a good rate for the length of the term, unlike the variable rates offered by savings accounts. CDs let you protect your assets against the chance rates could decline through the term of the deposit.
However, you shouldn’t open a standard CD if you’re trying to build an emergency fund. CDs’ inflexibility won’t make for easy withdrawals when you actually need to make a withdrawal, and early withdrawal penalties lower your savings. Stash money in a CD only when you know you won’t need access to the funds until maturity.
Is it safe to put money in a CD?
In terms of immediate security, your money is safe in a CD thanks to the security precautions individual institutions already have in place. This includes data encryption, internet firewalls, anti-virus and anti-malware protections, two-step account authentication and more. You can always check an institution’s website for detailed information about the security protections they implement.
Beyond electronic security measures, your CD deposits are also insured. Bank CD deposits are insured by the Federal Deposit Insurance Corporation (FDIC), and federal credit union CDs are insured by the National Credit Union Administration (NCUA).
The FDIC insures bank deposits up to $250,000 per depositor, per institution, per account type. If you keep $250,000 in a CD at one bank and $250,000 at another bank, both accounts are fully insured. If the banks holding each account fail, the FDIC will set you up with another account at a different bank with the same amount of money, or will send you a check for the amount you’ve lost. Check whether your bank is insured using the FDIC’s BankFind tool.
Federal credit union CDs are insured up to $250,000 by the NCUA’s National Credit Union Share Insurance Fund (NCUSIF). The vast majority of state-chartered credit unions are also by the NCUSIF.
Finally, CDs protect your money from the risk of falling interest rates. Placing your money in a long-term CD keeps your money safe from decreasing interest rates since you get to lock in your rate from opening to maturity. On the flip side, they can prevent you from taking advantage of rising interest rates — but a CD ladder can help minimize that risk.
How to build a CD ladder
A CD ladder is when you open several CDs at the same time, each with a different maturity term. As a CD matures, you renew the CD into the longest-term CD in the ladder. This allows you to take advantage of changing rates and provides you access of a portion of the total CD amount at regular intervals of time.
A common CD ladder example involves opening five CDs with different maturity dates: a 1-year CD, 2-year CD, 3-year CD, 4-year CD and 5-year CD. After the first year, your 1-year CD will mature. Take the money from that and place it in another 5-year CD. Repeat this process each year until you have a 5-year CD expiring every year. That way, you can continue to protect against dropping rates with certain accounts, while maintaining liquidity through yearly access to your money.
You can have a CD ladder that looks different than the above example, perhaps starting with a 3-month CD instead and building from there. It may just take a bit more planning if you don’t have the yearly timeline to follow.
CD penalties and fees to look out for
Since CDs don’t generally have monthly fees, its early withdrawal penalties that are important to watch out for. Early withdrawal penalties, or EWPs, are triggered when you withdraw any part of the principal from your CD before it has matured. Some institutions may not allow you to make a partial withdrawal, forcing you to withdraw all your money, close the account and pay the charge.
Early withdrawal penalties are typically expressed as a period’s worth of interest earned and vary from term to term, and between institutions. Typically, the longer the CD term, the larger the penalty. For example, an early withdrawal from a 1-year CD could trigger a penalty equal to three months’ interest, while a 5-year CD withdrawal penalty could equal a whole year’s worth of interest.
Still, we know it’s tempting to move your money to a higher-rate CD if one becomes available. From time to time, interest rates do increase during a period of CD ownership. In that case, make sure to do the math to determine if and when it is wise to break a CD.
Some institutions offer no-penalty CDs, which allow you to make withdrawals without paying the penalty. These typically aren’t long-term accounts, though, falling mostly around 1-year terms.
Choosing between a credit union CD and a bank CD
Credit union CD rates can be higher than bank CD rates, so if high rates are what you’re looking for, don’t count them out. You can easily check the highest rates on this page and see for yourself that credit unions largely lead the way in competitive yields. Just keep in mind that credit unions require membership, and they can restrict membership to selected communities. Some offer eligibility through organizational memberships or simple donations, so just verify the requirements for the credit unions you are interested in joining before you apply.
As nonprofit organizations where members are also owners, credit unions tend to be more transparent about where their funds are going. If you’re worried about how your CD funds are being used, joining a credit union may offer more peace of mind.
Online banks tend to offer the highest interest rates among all institutions, so if you want to stick to a bank or can’t find a credit union you’re eligible for, don’t shy away from an online bank. If you’re investing in CDs, you shouldn’t need physical access to your money via tellers or ATMs.
Taxes on CD interest
Unfortunately, you do have to cough some of that interest up to Uncle Sam in taxes. If you earn $10 or more in interest in a year, your bank or institution will send you a 1099-INT form to report on your tax return. They send a 1099 to the IRS as well. Whether you get a 1099 from your institution or not, however, you’re still required to report any interest earned on your taxes. If you earn $1,500 or more, you must also itemize the sources of that interest income on Schedule B of the 1040.
Designating a beneficiary for your CD
If you want someone to receive the funds from your CD, you can set them as your CD beneficiary. Each institution’s process may be different, so check with yours about their processes and requirements. For example, some might not allow multiple beneficiaries, or may require the Social Security numbers of your beneficiaries.
Once you establish a beneficiary for your account, the account is known as a “payable on death” or POD account, and is classified as an informal revocable trust account by the FDIC. In addition to “payable on death”, other commonly accepted terms that identify the account as informal revocable trust accounts include “in trust for” and “as trustee for”.
Setting beneficiaries for your CD allows you to increase your FDIC insurance past $250,000. To calculate your new coverage with beneficiaries added, multiply the number of owners by the number of beneficiaries multiplied by $250,000. So if you name three beneficiaries, you can increase your coverage to $750,000.
Understanding the differences between a regular CD and a brokered CD
Brokered CDs are a bit more like investment accounts than a regular bank CD account. For starters, they’re offered by brokerages and investment firms. These institutions buy large blocks of CDs from banks, and then divide them and resell small parts of the block to you, the customer. Brokerages shop around to find the most competitive CD rates, buying CDs in bulk from various banks. That way, they can give you the best rates. Brokered CDs can sometimes have higher rates than regular CDs (also called direct CDs in relation to brokered CDs). However, their rates can sometimes be lower. It depends on the interest rate environment
Interest is calculated a little differently on brokered CDs. While with a regular CD you normally look at APY and compounding, brokered CDs look at the term’s expected yield, which is generally a simple interest rate. Brokered CDs pay out this simple interest monthly, quarterly, semi-annually or annually, which is calculated only on the principal since there is no compounding. So if you start with a $25,000 investment with an interest rate of 3%, you’d earn $750 in interest at the end of the year. If you made that same deposit into a regular 3% CD, you’d earn $761 and some change in interest over a year.
Unlike regular CDs, you can sell your own brokered CDs on what’s known as the secondary market, even before your CD matures. This means you can get rid of your account at will without paying an early withdrawal penalty. However, because brokered CD rates fluctuate, this still may result in a loss of principal if you sell early while rates are higher than they were when you bought it. Buying and selling also often comes with their own sets of fees, much like investments.
Note also that buying and selling on the secondary market comes with its own risks. You’ll want to make sure you’re working with reputable sellers/buyers. The FDIC has cautioned that if an individual claims to have some sort of financial certification, verify their identity and credentials with either the Financial Industry Regulatory Authority, your local Better Business Bureau or your state’s consumer protection office.
Buying brokered CDs allows for increased FDIC insurance. The limit is still $250,000 per person per bank, but when you buy brokered CDs, you can keep multiple CDs issued by multiple banks with one brokerage/investment firm (like Fidelity, for example). So while you have several CDs under one roof, each still carries $250,000 in FDIC insurance if each was issued by a different bank and you don’t have other accounts at those banks.
CDs vs. other financial accounts
CDs work for a select few savings goals and needs. There are several other savings vehicles that can fill the gaps.
CDs vs. Savings accounts
A high yield savings account should be a part of your financial picture even before you open a CD. A savings account offers more liquidity than a CD, which makes it better for emergency funds and for certain short-term savings goals.
When comparing the best savings rates to the best CD rates though, you’ll find that CD rates tend to be higher. This is because banks are actively competing to win your CD business since it’s guaranteed you’ll be holding your money there for a while. But don’t be deterred; online banks still offer high savings accounts rates that are often higher than CD rates at most traditional banks.
Online savings accounts often save you from paying a monthly fee, a typical characteristic of traditional bank savings accounts. If there is a fee, typically ranging from around $5 to $15 a month, there may be a method or two of waiving it, either by maintaining a minimum balance or completing a certain number of transactions.
Money market accounts (MMAs)
Money market accounts (MMAs) are often like a checking-savings account hybrid. Like a savings account, MMAs are generally limited to six transfers and withdrawals per cycle. They also earn interest, and even historically have earned interest at even better rates than standard savings accounts. Like checking accounts, MMAs may include check writing abilities and/or a debit/ATM card. These perks are not universally offered, though; it depends on the issuing bank or credit union.
Money market accounts tend to require high balances to open and earn interest, setting a higher bar than standard savings accounts. If you can meet those requirements, you often stand to gain a bit more in interest.
Higher rates, checks and a debit card can come at a cost though. Money market accounts can often charge fees, again requiring high balances to waive. Even online banks, which don’t typically charge a monthly fee on their savings accounts, can charge a fee on their MMAs.
Individual retirement accounts (IRAs)
Individual retirement accounts (IRAs) are used much like they sound, for your retirement savings. You can open an IRA in a variety of ways, either with a brokerage as an investment account or with a bank or credit union as a deposit account. Many institutions allow you to place CDs in an IRA, just be sure to check first.
IRAs come with some limitations, namely their contribution limits set by the IRS. For 2023, you can contribute up to $6,500 into an IRA. If you’re over 50 years old, you may also make additional catch-up contributions up to $1,000.
Individuals generally have two IRA choices: traditional or Roth. Traditional IRAs offer a tax break when you make your contributions. The contributions are tax-deductible and your money grows tax-free inside the account. You pay taxes on the money when you make your withdrawals in retirement. On the other hand, Roth IRA withdrawals are tax-free, since you pay taxes on your contributions instead. Your money still grows tax-free while inside the account.
Bonds and CDs are similar in that they operate according to a set term. But while a CD is issued by a bank or credit union, a bond is issued by governments or companies. Bonds can be purchased at brokerage firms.
When compared to brokered CDs, bonds have several similar attributes. New-issue brokered CDs and bonds are often free to buy at brokerage firms. Both brokered CDs and bonds can be sold at the brokerage firm through the secondary market. In this case, there are usually fees when the brokered CD or bond is sold. Also, there is interest rate risk if the CD or bond is sold before maturity.
Treasury bonds (shorter duration Treasury bonds are called Treasury bills and notes) are more similar to brokered CDs in that they are backed by the United States government. Unlike CDs, there are no dollar limits on the guarantee. Bonds issued by state and local governments and bonds issued by companies are not backed by the United States government, and thus have a risk of default. Consequently, these bonds will often have higher yields than yields from brokered CDs or Treasury bonds.
Unlike CDs, certain bonds can be exempt from certain types of income tax. Treasury bond interest is exempt from state and local income tax. Municipal bonds (issued by city and states) have interest that is generally exempt from federal income tax.
The differences in interest rates between CDs and bonds depend on the interest rate environment. In some environments, such as during periods when the Fed sets its policy rates near zero, the best CDs often have the highest rates when compared to Treasury bills and notes. During times when the Fed is raising its policy rates, Treasury bills and notes often have the highest rates.