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Understanding the DepositAccounts 1-Year Online CD (1YrOCD) Index
The 1-Year Online CD (1YrOCD) Index is intended to provide a representative yield that’s available from today’s 1-year online CDs. The Index is the average yield of ten mature 1-year online CD accounts from well-established online banks. The 1-year online CDs must have at least two years of history with yields that have remained competitive. Promotional accounts are excluded from the Index so that consumers can learn what rates are reasonable to expect from 1-year online CDs. Changes in the 1YrOCD Index over the last two years are tracked and compared to the federal funds target rate.
Recent Changes in the DepositAccounts 1-Year Online CD (1YrOCD) Index
The 1YrOCD Index started to fall from its peak in April 2019, almost four months before the first Fed rate cut on July 31st. During the 9-month period from April 1, 2019 to January 1, 2020, the 1YrOCD Index fell by 72 bps, while the federal funds target rate fell by 75 bps. The month with the largest decline was June when the 1YrOCD Index fell by 16 bps. April and December are tied for the month with the smallest decline. The 1YrOCD Index fell 3 bps during both months. The fact that December is one of the months with the smallest yield decline suggests that rates are starting to stabilize.
During the 9-month period from April 1, 2019 to January 1, 2020, the 1-year online CD in the 1YrOCD Index that had the largest yield decline was at PurePoint Financial. Its 1-year CD yield fell by 85 bps to 1.95%. The 1-year online CD in the Index that had the smallest yield decline during this period was at Discover Bank. Its 1-year CD yield fell by only 65 bps to 2.00%.
As can be seen in the 1YrOCD Index chart, 1-year online CD yields have exceeded the upper limit of the federal funds rate target range by 3 to 48 bps. During the period in 2019 from January through May when it appeared that the Fed’s pause would continue for many months, the 1yrOCD Index exceeded the upper limit by 19 to 26 bps. If another Fed pause period occurs, the 1yrOCD Index may once again remain in a range of 19 to 26 bps above the upper limit. As of January 1, 2020, the Index has a yield of 2.04%, which exceeds the upper limit by 29 bps. If the federal funds target remains in a range of 1.50% to 1.75%, we may see a few more small rate cuts to online 1-year CDs before yields stabilize near 2.00%.
Why 1-year CD rates?
One-year CD rates provide a good benchmark for both rate watchers and issuing financial institutions alike. It’s not exactly a long maturity, especially when compared to 5- and 10-year terms. But it’s also not a short maturity, either, given the popular 3-month terms offered by many banks and credit unions. Call it the Goldilocks account: a 1-year CD gives savers the ability to secure an attractive return on their investment, but without locking up funds for too long, potentially causing them to miss out on better offers down the line.
The 1-year CD rates in the table above are listed from the highest Annual Percentage Yield (APY) to the lowest. By clicking on the plus button to the left of an offering, you can view account details and rate history for that particular product. If you click on the bank or credit union’s name, you will be taken to our hub for that financial institution. On this page, you can view a map of the branch locations, other product rates, and consumer reviews.
1-Year CD Rate History – Average APY (%) Rate Trend Over Time
How do CDs work?
Certificates of deposit are time deposit accounts that operate on a deadline. Each CD has a term, ranging between three months and 60 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.
When you open your account, you are generally required to meet a minimum deposit requirement. This can range from $0 to more than $25,000, 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 the for a while.
How CD interest rates work?
When you research CD rates on an institution’s website, you usually see separate figures for an account’s interest rate and annual percentage yield (APY). The interest rate is the yield your money earns over the course of one year. The annual percentage yield, or APY, specifies the real rate of return, taking into account the effect of compounding.
Depending on the institution, interest earned on a CD may compound daily, monthly or sometimes quarterly. Daily compounding is the most efficient way to grow your savings. With daily compounding, the interest your money earns today is added to the total balance in the CD, incrementally increasing the total amount of money that earns interest tomorrow and the next day, and so on, until maturity.
If you deposit $5,000 into a 1-year CD, for example, and it compounds interest daily at a 3% APY, at the end of the term, you’ll have earned $152.27 in interest. Change the compounding to quarterly, and you’ll have earned $151.70 in interest. That might not seem like much, but the savings can really add up over time.
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 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 also insured up to $250,000 by the NCUA’s National Credit Union Share Insurance Fund. State-chartered credit unions are regulated by the state supervisory authority where the credit union’s main office is located, although they can also request NCUA insurance.
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.
1-year CDs vs. 5-year CDs
In addition to 1-year CDs, 5-year maturities are also a key benchmark for CD rate watchers. They tend to have the best rates, and they are important indicators when looking at the CD yield curve to gauge how rates are performing.
The 1-year CD is a secure way to grow savings over a relatively short period of time and will typically gain slightly more in interest than a high-interest savings account over that period.
A 1-year CD is defined by the Federal Reserve as a time deposit, and is sometimes called a 12-month CD.
5-year CD rates are among the highest CD rates in the country and offer solid returns for a fixed investment period. They’re better for longer-term savings goals, since you have to wait five years for the term to mature. They’re also a great choice if you think interest rates will go down within the next half a decade.
Opened together, 1-year and 5-year CDs can help you get a feel of both short- and long-term accounts. The 5-year will protect against potentially lower interest rates, but if rates do go up, the 1-year CD frees you up to take more advantage of that.
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. This allows you to take advantage of changing rates and provides you payouts every year.
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.
Tips on choosing 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.
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 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 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 a revocable trust account by the FDIC.
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 CDs from banks, credit unions and other institutions, and then resell them 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.
Interest is calculated a little different 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 assets 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 institution, but when you buy brokered CDs, you can keep multiple CDs with one institution (like Fidelity, for example). So while you have several CDs under one roof, each still carries $250,000 in FDIC insurance.
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.
A standard 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 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 more competitive. 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.
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 like a checking-savings account hybrid. Like a savings account, MMAs are 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 2019, you can contribute up to $6,000 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 you would get a CD from a bank-like institution, you typically buy bonds from governments or companies.
Bonds generally charge upfront fees as well as trading costs, a downside you don’t normally see with traditional CDs. Bonds are also long-term assets. While CDs often start at three months, bonds take 10 years or longer to mature. This timetable does offer some stability, though, which is why people tend to add them to their investment portfolios to balance out their riskier stocks investments.
If you’re just looking for a higher payout, however, CDs might be the way to go. U.S. Treasury bond rates have fallen since the financial crisis, falling to a paltry 0.5% in 2013. As of October 2019, the bond yield for a 5-year investment is at 1.34%, while the best nationally available 5-year CD rate is 3.00% APY.