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CDs vs. High-Yield Savings Accounts: Which is Right for Your Savings Goals?
By Kit Pulliam,
2024-07-22
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There are several key differences between CDs vs. high-yield savings accounts.
Delmaine Donson/Getty Images
CDs are a great choice when you're depositing money you don't plan on touching for a while.
High-yield savings accounts are useful if you want to deposit or withdraw money at any time.
Consider using both CDs and a high-yield savings account for a mix of flexibility and predictability.
When opening a bank account, it can be difficult to know whether to choose a CD or a high-yield savings account . Both are great choices, as they offer high interest rates and allow you to earn more money on your savings than traditional savings accounts.
A CD, or certificate of deposit, is a bank account that keeps your money for a set length of time.
For example, if you open a 2-year CD , you'll pay a penalty if you withdraw money before the full 24-month term ends. In return, a CD offers a fixed interest rate. If a bank offers both CDs and high-yield savings accounts, most of its CD term rates tend to be higher than its high-yield savings rates.
Depending on what type of CD you open, its term length could range from 30 days to five years. CD rates vary depending on their term length and which bank or credit union you use.
Overview of high-yield savings accounts (HYSAs)
A high-yield savings account is a type of savings account that gives you easy access to your money. You can set up electronic transfers online or visit an ATM or branch location to make deposits and withdrawals.
Alvin Carlos, a CFP professional with District Capital Management, says high-yield savings accounts are "one of the best games in town" thanks to high interest rates and minimal downsides.
Unlike CDs, you don't have to wait a certain amount of time before withdrawing money from a high-yield savings account. In exchange, interest rates tend to be slightly lower than for CDs at the same bank.
Key differences between CDs and HYSAs
The primary differences between CDs and high-yield savings accounts are their interest rates, withdrawal periods, and deposit rules. CDs offer a fixed interest rate that tends to be slightly higher than the variable one offered by high-yield savings accounts, depending on the bank.
In exchange, you generally can't withdraw your money until the term ends without paying an early withdrawal penalty , unless you open a no-penalty CD. You also can't keep depositing money throughout the term — you deposit money when you open the account, then let it sit.
You can take money out of a savings account much more easily. However, some savings accounts place a limit on how many times you can withdraw money per month. If you go over that number, you may have to pay an excess withdrawal fee. Check with your bank to see if it has these restrictions.
Differences between CDs and savings accounts
CD
High-yield savings account
Interest rate
Fixed
Variable
Withdrawing money
After the term ends
Any time
Depositing money
Only the initial deposit
Any time
Pros and cons of CDs vs. savings accounts
CD
High-yield savings accounts
Pros
FDIC-insured
Often pays a higher interest rate than high-yield savings account
Fixed interest rate means you know exactly what you're going to earn
Variable interest rate means your rate could increase later
Cons
Early withdrawal penalty if you take out money before term ends
Cannot add more money after the initial deposit
Fixed interest rate might not keep up with with market trends
Interest earned is subject to federal and state taxes
Cons
Rate is usually a little lower than what a CD pays (especially a short-term CD)
Variable interest rate means your rate could decrease later
Interest earned is subject to federal and state taxes
Choosing the right option for you
Both CDs and high-yield savings accounts are FDIC-insured , and they both require you to pay federal and state taxes on the interest you earn. Both offer high interest rates, although CD rates will be higher on average when using the same bank — it depends on which CD term you open, though.
A CD's fixed interest rate means you'll know exactly how much money you're getting at the end of the CD term, but the rate might not keep up with the market if banks raise CD rates across the board. Comparatively, high-yield savings interest rates could rise with the market, but there's a chance they'll fall with the market, too.
CDs and high-yield savings accounts are both great options for storing your money. Which one you choose largely depends on when you'll need access to your money. You might even want to use multiple bank accounts to earn the most interest possible while still being able to access your savings.
"We recommend our clients to put three to five months of their emergency fund , if they have that much, in a high-yield savings account because it's liquid," says Carlos. If you don't need quick access to your money, he says, "You can put it in a CD, so it's making more money."
When to choose a CD
You want a guaranteed return
CDs are ideal for someone looking for a safe and predictable way to grow their money. Carlos recommends considering CDs to save for big-ticket items you know you'll want at a specific point in the future.
For example, if you're planning on buying a home in a year, you could put money for a house down payment in a 1-year CD . That way, you'll have the money when it's time, and you won't be tempted to dip into the funds to pay for something else. Just remember: You won't be able to deposit additional money into the CD until the term ends.
You don't need access to your funds for a set period
Parting ways with your money is the only way to guarantee you'll get the most out of a CD.
If you're comfortable locking up your cash and have other ways of covering an emergency or an unexpected bill so you can avoid an early withdrawal penalty, a CD is a better option than a high-yield savings account.
You're comfortable with potentially missing out on higher rates if the market changes
Traditional CDs lock in a fixed interest rate for the entire CD term. If banks raise interest rates on CDs during your term, you're stuck with a lower rate.
However, some financial institutions offer bump-up CDs , which allow you to request one rate increase on your CD during your term.
When to choose a high-yield savings account
You want easy access to your savings
A savings account gives you full flexibility to add or withdraw money whenever you want. While some banks still impose a six-times-per-month limit on savings account transfers , it's no longer federally mandated.
You're willing to accept a variable interest rate for the potential of higher returns if rates increase
When it comes to interest rates, a high-yield savings account is a riskier bet — but could lead to a greater reward.
Bank interest rates, including those on high-yield savings accounts, fluctuate based on decisions made by the Federal Reserve . While that means the rate can go down at any time, it also means it could rise. By stomaching some rate unpredictability, it means you won't miss out on a rate increase in the future.
CD vs. high-yield savings account FAQs
Which has higher interest rates, CDs or high-yield savings accounts?
CDs offer higher interest rates on average when using the same bank, but high-yield savings accounts are better if you want to easily deposit and withdraw your money. Both CDs and high-yield savings accounts are great options for depositing your money.
What happens if I need to withdraw money before the CD term ends?
If you need to withdraw money before the CD term ends, most financial institutions charge an early withdrawal fee. It typically ranges from three to six months of interest, depending on your term length.
Are my savings safe in both CDs and high-yield savings accounts?
Yes, both are safe and protected by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) for up to $250,000 per account, per ownership category, per institution. This protects your money in the event of a bank or credit union collapse.
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