This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
CD rates are impressive. Read on to discover why they might not be the best option for your money. [[{“value”:”
Image source: Upsplash/The Motley Fool
Right now is a great time to invest in certificates of deposit (CDs). Many CDs pay annual percentage yields (APYs) of 5% or higher, making them a tempting place for many people to store their cash and earn some interest.
But even with these impressive CD rates, I’m skeptical that they’re a good place for my money right now. Here are three reasons I’m content to watch CDs from the sidelines.
1. I’d rather put my money in the stock market
CDs are a relatively safe investment. They’re FDIC-insured, meaning the federal government guarantees your deposit amount, just like a savings or checking account. CD interest rates are also (mostly) guaranteed. You’ll earn the advertised interest rate if you leave your money in the CD for the entire term period.
Despite these benefits of CDs, I’d rather invest my extra cash in the stock market using a brokerage account. The S&P 500’s historical average annual rate of return is just above 10%. There’s no guarantee I’ll earn that much, of course. But I still have plenty of years left before I retire, so I’m OK with weathering market volatility as I try to earn as much as possible.
For example, let’s say the S&P 500 earns a conservative rate of return of 7% over the next five years, compared to a 5% CD APY. If I invest $5,000 into the stock market, I could earn $692 more over that period compared to the CD.
2. CDs aren’t always tax-efficient
The interest you earn on CDs is taxable income for your federal filing. States that have a state income tax may also take a slice of your interest. You can put your CD into an IRA account to defer paying taxes until you take distributions, but this option may be more complicated than the average investor wants to deal with.
As such, CDs aren’t always tax-efficient for investors. I’d rather find other tax-advantaged ways to invest my money that don’t require putting a CD into an IRA. For example, Charles Schwab says that investors in high-tax states, like California and New York, may want to consider investing in Treasury bonds instead. Treasuries are exempt from state income taxes and often pay comparable rates.
Tip: If you opt to open a CD in an IRA, there are many great IRA accounts to choose from. Many of them even have low or no commissions or trading fees.
3. I want easy access to my money
CDs have specific term lengths you must agree to if you want to earn their advertised APY. For example, if a 5-year CD pays a 5% APY, you must leave your money in the CD for the entire five years to earn that interest rate.
If you withdraw money early, you’ll be penalized for the amount withdrawn. The penalty is usually 90 days of simple interest for CDs with terms of two years or less. The fee generally increases to 180 days of simple interest for CDs with terms longer than two years.
I want easy access to my money for emergencies or other unexpected expenses. For these reasons, a high-yield savings account is a better option for me because it doesn’t have the same restrictions as a CD.
CDs aren’t a bad option for your money, but you should compare them to alternative investment options before you open one. Decide ahead of time what your investment goals are, and then compare CDs, savings accounts, or stocks to decide which is the best choice for you.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
“}]] Read More
