What’s a good 5-year CD rate now?
A good CD rate is one that’s well above the average CD rate. When looking at CDs, two types of averages should be considered: the national average and the online average.
The national average includes CD rates from banks and credit unions that primarily operate through their physical branch offices. This is the vast majority of banks and credit unions.
Meanwhile, the online average only includes CD rates from banks that operate without physical branches. All transactions at these banks occur online, through mobile apps or by phone. Because online banks don’t have the cost of maintaining a branch network, they can offer much higher deposit rates.
National average 5-year CD rates
The average national 5-year CD rate is 2.08% for banks and 2.95% for credit unions as of June 2024.
Average online 5-year CD rate
The average online 5-year CD rate is 3.82% as of August 2024.
Where you can find the best 5-year CD rates
High 5-year CD rates are irrelevant if you can’t trust the institution. Thus, only federally insured banks and credit unions should be considered in a search for the best 5-year CD rates. The Federal Deposit Insurance Corp. (FDIC) provides federal deposit insurance for banks, and the NCUA provides it for credit unions. Federal insurance is backed by the full faith and credit of the U.S. government.
Online-only banks often have the highest 5-year CD rates. They can afford to pay higher rates since they don’t have the overhead of a branch network.
Brick-and-mortar banks typically have lower rates than online banks, but sometimes, they offer CD specials that can have rates comparable to online bank CD rates. CD specials may have terms slightly shorter or longer than standard CD terms, such as 59 months. They may also require new money, which comes from your account at another bank.
Credit union CDs often have higher rates than bank CDs. As not-for-profit institutions that are taxed less than banks, credit unions can afford to pay higher CD rates. Credit unions typically have different names for their CDs, such as share certificates. Like banks, credit unions also offer CD specials, which often have the best rates.
Key factors besides the highest CD rate
The CD with the highest rate may not be the best option for you. You might want to consider other factors in addition to the rate:
- Minimum deposit: CDs often have minimum deposit requirements. This is the minimum amount needed to open the CD, and the amount can range from $100 to $100,000 or more.
- Maximum deposit: Banks sometimes set a maximum deposit for a CD. This is common when a CD has a rate far above its competition. Banks can use this type of CD to attract new customers who may not realize how a small maximum deposit limits their gain from the high rate.
- Callable or noncallable: Most CDs that you buy directly from a bank or credit union are noncallable CDs, meaning the CD will last and pay interest through its entire term. On rare occasions, banks offer callable CDs that allow the bank to end the CD early. If this happens, the CD holder is paid the full amount of interest up to the day of closure. But that could be a disappointment if interest rates have fallen, leading you to miss out on future earnings at the higher rate. Due to this flexibility given to the bank, callable CDs often have rates higher than noncallable CDs.
- Fixed rate or variable rate: Most CDs are fixed-rate, meaning they pay a steady interest rate for the entire term. On rare occasions, banks offer variable-rate CDs whose interest rate varies during the term of the CD. Rates may vary based on an index or by set amounts at regular intervals. The starting rates on variable-rate CDs may be much higher than those of standard CDs, but a fair rate comparison requires determining the rates of the variable CD throughout the entire term.
- Regular interest payments: Some banks allow the CD holder to receive regular interest payments from the CD. Instead of interest being added back to the CD, it's paid out monthly, quarterly or at some regular interval in the form of a check, an internal transfer or an Automated Clearing House (ACH) transfer.
- Early withdrawal penalty: Most CDs have an early withdrawal penalty, which is a fee that the bank charges if you request a withdrawal or closure of your CD before the end of its term. This penalty is often based on a certain number of months of interest that the CD pays. For example, a 6-month early withdrawal penalty would subtract six months of interest from the CD at the time of withdrawal. If the withdrawal is done early into the term, the penalty may actually reduce the CD's principal amount.
- Early withdrawal of interest without penalty: Some banks allow the CD holder to request the withdrawal of the accrued interest without a penalty. The principal is not touched.
- Partial early withdrawals: Some banks allow CD holders to make partial early withdrawals of principal. The penalty would be based only on the portion of the principal being withdrawn.
- Early withdrawal guarantees: Some banks specify in their disclosures that an early withdrawal of a CD is allowed only if they consent. In these cases, the bank has the right to refuse an early withdrawal. So, if you think you may need to withdraw your funds early, make sure it's an option before opening a CD.
- Process to open and fund the CD: Some banks make it difficult to open and fund a CD. Many banks don’t have full digital applications and funding options for their CDs. The application may require mailing in forms, and the CD may require funding with a paper check. This can complicate and delay the CD opening process.
- Process to close a CD and receive the funds: Some banks make it difficult to close a CD and receive the funds. The bank may require closing instructions to be provided by a written letter or a phone call, and the only option to receive the funds may be through a mailed check. The best banks make it possible to request closure using online software, and they provide several options to receive the funds, including internal and ACH transfers.
Tips on opening and managing a 5-year CD
Once you decide on a CD, be careful while opening and managing the CD to avoid any unpleasant surprises. Check out the tips below to ensure that your CD experience runs smoothly:
- Review the CD disclosure. Not all banks make CD disclosures easily accessible before you begin the application. If you can’t find it, request a copy before you start the application. Ensure that the attributes listed in the disclosure are consistent with the CD attributes that you read from other sources.
- Verify you can open a CD in your desired ownership category. Online banks sometimes cannot open CDs as joint accounts or trust accounts. Ensure that the bank can open the CD in your needed ownership category and that you understand what’s required. For informal trusts, such as payable-on-death accounts, additional work after the online application may be required to ensure all beneficiaries are properly designated.
- Confirm the CD funding process. ACH transfers are a convenient way to fund a CD, but make sure the maximum transfer limit isn’t below your initial deposit amount. Wire transfers can handle larger deposits, but they often have fees associated with them.
- Mark the CD maturity date. Once the CD is opened, mark the CD maturity date in your calendar. CDs often automatically renew as new CDs with much lower rates, so it’s important not to miss the date when your CD matures.
- Note the CD’s grace period. The grace period is the time after the maturity date when you can close the CD and withdraw the funds without facing an early withdrawal penalty. Grace periods are generally between seven and 10 days, but they can be up to 21 days.
- Understand the process for closing the CD. Banks typically make it easier to open and fund a CD than to close it and receive the funds. For example, some banks that allow funding a CD with an ACH transfer don’t offer the same process for receiving the funds at closure. It’s best to know these details before requesting a CD closure.
Pros and cons of a 5-year CD
A 5-year CD can help you save for medium-term goals. It can also be useful as a part of your investment savings to provide stability and safety. Here are the pros and cons of a 5-year CD:
- Very safe: When the CD is directly held at FDIC-insured banks or NCUA-insured credit unions, the principal and all accrued interest are protected up to the insurance limits.
- Relatively high interest rate: The 5-year CD generally has higher interest rates than savings accounts and shorter-term CDs. There have been times when this wasn’t true, but it has been the case for the majority of the last few decades.
- Rate is typically fixed: The interest rate for 5-year CDs is typically fixed for the entire term, which is a benefit when interest rates are falling.
- Predictable returns: Banks often allow CD interest to be paid out on a regular basis. This provides a predictable source of income for the entire CD term.
- Forced savings: The early withdrawal penalty discourages using the principal for spending. That helps you save more.
- Early withdrawal penalty: Accessing the principal before the CD matures can result in losing part or all of the accrued interest. It can even potentially reduce the principal.
- Interest earned taxed as ordinary income: If the CD is held in a taxable account, interest earnings are taxed as ordinary income. This is a disadvantage compared to stocks and other investment options. Stock returns come from capital gain and dividends, and they are often subject to a lower tax rate than ordinary income.
- Opportunity cost if interest rates rise: If interest rates rise after you open a CD, your money is locked up, and you may miss out on earning higher rates.
- May not keep up with inflation: CD rates are often below the inflation rate. That’s especially the case for a CD’s after-tax rate of return. Thus, you may actually be losing money from a CD based on a real rate of return that factors in inflation. Other investments like stocks and stock mutual funds carry risk, but they have a history of long-term rates of returns above inflation.
- Less flexibility compared to savings accounts: Unlike savings accounts, CDs only allow an initial deposit. Additional deposits are not allowed during the term of the CD. To add more money, opening a new CD would be necessary.
- Risk of forgetting CD maturity date: CDs are often set up by banks to automatically renew into a new CD at maturity. That new CD will often have a lower rate. If you forget about maturity until after the CD grace period expires, you may become locked into a low-rate CD.
Alternatives to a 5-year CD
The alternatives to a 5-year CD can be grouped into two categories. The first category includes other types of bank accounts, and the second includes investment accounts.
Note that the only alternatives included below are those that, like a CD, have no principal risk if held to maturity.
Other bank accounts:
- Shorter-term CDs: In the past, it was common for 5-year CDs to have higher rates than any shorter-term CD, which could make the extra time of the 5-year CD rate lock worthwhile. When short-term CD rates are higher than 5-year CD rates, the primary benefit of 5-year CDs is the rate lock. This allows you to maintain a high rate for multiple years when interest rates fall.
- High-yield savings accounts and money market accounts: In the past, it was common for 5-year CDs to have higher rates than high-yield savings accounts (HYSAs) and money market accounts (MMAs). When HYSA and MMA rates are higher than 5-year CD rates, the primary benefit of the 5-year CD, again, is the rate lock. High-yield savings accounts and money market accounts have no rate locks, and their rates will quickly fall when the Federal Reserve lowers rates.
- Brokered CDs: A brokered CD is technically a bank account, which can have FDIC insurance. However, unlike a traditional CD, a brokered CD must be purchased at a brokerage firm. Banks issue brokered CDs for listing at brokerage firms, and brokerage customers then buy these CDs and hold them in their brokerage accounts. Like a standard CD, the principal is guaranteed to be returned at maturity. A significant difference is that early withdrawals are not possible with brokered CDs. Instead, if funds are needed, the brokered CD must be sold on the secondary market, and sometimes at a loss, especially if interest rates have risen.
Investment accounts:
- Series I savings bonds (I bonds): Savings bonds are issued by the U.S. Department of Treasury to help ordinary Americans save. The I bond pays a combination of a fixed rate and an inflation rate, adjusted semiannually. A maximum of $10,000 of I bonds can be purchased by an individual at the Treasury’s website per calendar year. They must be held for at least one year before they can be redeemed. If they’re redeemed before five years, the last three months of interest is lost. They continue to earn interest for a maximum of 30 years. Unlike CDs, I bonds are exempt from state and local income tax. Federal income tax can be deferred until the I bond is redeemed or until it reaches 30 years.
- Treasury Inflation-Protected Securities (TIPS): TIPS are a type of U.S. Treasury bond designed to protect investors from inflation. It’s similar to I bonds in its inflation protection, but it’s designed more for investors than ordinary American savers. Unlike the I bond, it can be purchased at brokerage firms in addition to the Treasury’s website. If purchased at brokerage firms, TIPS can be sold on the secondary market if funds are needed before the TIPS mature. There is essentially no maximum deposit.
- Treasury bills and notes: Like TIPS, Treasury bills and notes are a type of U.S. Treasury bond designed for investors. They can be purchased at brokerage firms in addition to the Treasury’s website. Both Treasury bills and notes provide a fixed rate of return until maturity. Treasury bills have term lengths from four weeks to one year, while Treasury notes have term lengths that range from two years to 10 years.
Frequently asked questions (FAQs)
What is a CD?
A certificate of deposit (CD) is a savings product offered by banks and credit unions that provides a set interest rate. All CDs have a term period that can range from one month to 10 years. The CD is opened with an initial deposit. During the term, interest is earned, which is either added back to the CD or paid out on a regular basis. Accessing the CD principal before maturity results in an early withdrawal penalty. At the end of the term, the CD principal and all interest earned are available for withdrawal.
What if I need to access my CD money early?
If you need access to any part of a traditional CD's initial deposit, or principal, before maturity, the bank typically allows the withdrawal but charges an early withdrawal penalty. The penalty is usually a certain number of months of interest that the CD has been earning.
Sometimes, the bank may allow a partial withdrawal of the principal and apply the penalty only on the interest earned on the amount withdrawn. Other times, only an early full withdrawal and CD closure are allowed, in which case the penalty includes the interest earned on the entire principal.
How do I use 5-year CDs to build a CD ladder?
The basic method to build a CD ladder with 5-year CDs starts with dividing a deposit into five equal parts. Each part is used to open a CD. The five CDs purchased have 1-, 2-, 3-, 4- and 5-year terms.
When each CD matures, the money is then reinvested into a new 5-year CD. So after the 4-year CD matures, all five CDs will have 5-year terms. Then, each year, one of the five 5-year CDs will mature, which provides yearly access to a fifth of the total amount without any penalty.
Will a jumbo 5-year CD have a higher rate?
Jumbo CDs are CDs that have large minimum deposit requirements, ranging from $10,000 to $250,000. Banks and credit unions may offer higher interest rates on their jumbo CDs. However, many banks don’t offer higher rates for larger CD deposits, and sometimes, the highest CD rate for a region is from a bank that offers CDs with only small minimum deposit requirements.
Are 5-year CD rates going up?
In 2023 and 2024, 5-year CD rates have generally been flat, with some small declines. Even though the Federal Reserve increased its benchmark rate a full percentage point in the first half of 2023, banks generally chose not to raise long-term CD rates. The banks were concerned that interest rates would fall in future years and didn’t want to lock themselves into paying a high rate long-term.
With expectations growing that the Fed will lower its benchmark rate in the second half of 2024 and in 2025, 5-year CD rates are likely to fall for the rest of 2024 and into 2025.
Why are 5-year CD rates lower than 1-year CD rates?
In 2023 and 2024, long-term CDs, such as 5-year CDs, generally had lower rates than short-term CDs with terms of one year and under. During this time, the markets expected interest rates to be much lower after a couple of years. These market expectations first caused long-term Treasury securities, such as the 10-year Treasury note, to have lower yields than shorter-term Treasury securities, such as the 1-year Treasury bill. This inverted yield curve was then adopted by the banks.
How can interest be paid for a 5-year CD?
The best banks provide multiple options for paying CD interest. The basic option is to have the interest added back to the CD. Another common option is to have the interest paid out to the customer by a check, ACH transfer or internal transfer. The regular interest payouts can be monthly, quarterly or yearly. Investors who choose 5-year CDs often want regular interest payments to supplement their income.
Will I owe taxes each year on a 5-year CD?
Yes, you will owe taxes each year on the interest earned from a 5-year CD. This is even the case if interest is added back to the CD and not paid out. The interest earned on a CD that’s in a taxable account is subject to federal income tax, and it can also be subject to state and local income tax. Interest is considered earned when it’s credited to your account. Most banks credit CD interest monthly, quarterly or annually, and this results in annual tax liability.
How much interest will be earned from a 5-year CD?
For a traditional CD with a fixed interest rate, it’s easy to calculate the total interest that will be earned when the 5-year CD matures. If interest is added back to the CD, the total interest earned can be calculated based on the initial deposit and the annual percentage yield (APY) of the CD. For a five-year period, annual compounding increases the total interest so it's larger than just the initial deposit multiplied by the APY and multiplied by five. This Compound Interest Calculator can be used to determine the exact amount of total interest that will be earned.
What are the risks of a 5-year CD?
If you need some or all of the initial deposit back from the CD before it matures, you will be charged an early withdrawal penalty that may reduce the principal. At the very least, the penalty will reduce the interest you earn from the CD.
There’s also a risk of missing out on other higher-rate investment alternatives. One higher-rate alternative could be another CD, which could be the case if interest rates rise during the 5-year term.