CD rates are soaring, but high rates may not last
It’s a good time to have cash savings.
Some banks are offering rates of 5% or higher on certificates of deposit, federally insured accounts that lock in a rate for months or years.
“CD yields are the best we’ve seen in 15 years,” said Greg McBride, chief financial analyst at Bankrate.com.
And rates on many online savings accounts, which have few restrictions on the timing of withdrawals, are also attractive, with some institutions offering rates of 4% to just under 5%. Apple is even getting in on the act, offering high-yield savings accounts paying 4.15% to customers who hold its AppleCard.
But the high rates may not last.
Banks may offer premium rates on CDs to attract deposits, but once they get those deposits, they end the offers. Ken Tumin, founder of DepositAccounts.com, part of LendingTree, cited as one example Hyperion Bank in Philadelphia, which recently ended a promotional offer of 5.5% on a 19-month CD.
“We might be reaching the peak,” he said, suggesting that savers looking for high yields may not want to wait much longer to lock in CD rates.
Rates paid on savings have been rising, especially at online banks, as the Federal Reserve has been aggressively hiking its benchmark interest rate to tame inflation. More recently, a broader pool of banks raised their rates in part because of industry turmoil in the wake of two bank failures. “Banks were concerned about liquidity and wanted deposits,” leading them to raise rates paid on savings, Tumin said.
Even some of the nation’s biggest banks are now offering better rates on CDs. Citibank this week was offering CDs from nine months to 18 months at 4.05%, with a rate as high as 4.75% on a nine- month certificate of $100,000 or more. Chase has a three-month CD with rates from 2% to 4% for customers with Chase checking accounts, depending on the size of the deposit; the top rate requires a minimum deposit of $ 100,000. It also offers one-year CDs for customers, from 3% to 3.75%. The bank said CD rates may vary by location. Wells Fargo
offers a f ive- month CD at 4.1%, with a $5,000 minimum deposit; checking account customers get a higher rate.
To get a CD rate of 5% or even more, you’ll generally have to tie up your funds for around a year. Synchrony Bank, for instance, offers a 14-month CD with an annual percentage yield of 5.15%. Marcus, the consumer banking arm of Goldman Sachs, is offering a 10-month CD at an annual percentage rate of 5.05%.
Whether it’s worth tying up your money for more than a few months depends on your goals for the cash. “How long can you live without the money?” McBride asked.
If your stash is meant for emergencies, like a car repair or medical bills, you shouldn’t restrict your access to it for long. You want to be able to withdraw the cash quickly if you need it, without worrying about paying a penalty. You may be better off getting a slightly lower rate in a high-yield savings account, with fewer restrictions on withdrawals.
If you have a large expense coming at a known date in the future, however — say, a college tuition payment — a longer- term CD makes sense.
People who are retired or near retirement may also benefit from longerterm CDs with higher rates because they often want to have two years of living expenses in safely held cash, said Pam Krueger, founder of Wealthramp, a service that matches clients with feeonly financial advisers. The paltry interest rates of recent years punished retirees, she said, so higher CD rates of 3% to 5% offer welcome relief: “We’re in this golden moment.”
But given concerns about the economy and uncertainty about whether the Federal Reserve will continue raising rates, it’s unclear how long banks will continue to pay the high rates. One way to deal with the murky outlook, Krueger said, is to create what’s known as a “CD ladder,” in which you divide up your savings among several CDs with different maturities. The approach aims to maximize the interest earned, while allowing periodic availability of funds. For example, if you had $ 20,000, you could open four CD accounts, each having $ 5,000 deposits, with term lengths of three, six, nine and 12 months. When the three- month account matures, you can reinvest the money in another 12-month CD (or spend it, if you need the cash). You can set up a ladder yourself or have a brokerage do it for you.
Here are some questions and answers:
How can I make sure my savings are covered by federal deposit insurance?
Given the recent banking upheaval, savers are especially interested in making sure their funds are protected. The Federal Deposit Insurance Corp. generally protects up to $ 250,000 per depositor, per insured bank. If you share an account with another person, you each get $250,000 of coverage, for a total of $ 500,000. (The federal government chose to insure all deposits — even those above the insured cap — at the two banks that failed in March. But there’s no guarantee the government will do that in the future.)
The FDIC also insures funds by type of account ownership, so it’s possible to get more than $250,000 in coverage per depositor at the same bank, depending on how the funds are held. A couple, for instance, could have a joint savings account with $500,000 in it and two separate accounts under their own names with $ 250,000 each and be insured for a total of $ 1 million, according to the FDIC’s online insurance tool.
Insurance for multiple people and different types of accounts can be complicated to parse through, so the FDIC has an online tool to help you estimate your total. You can also submit questions online or call 1- 877- 275- 3342 (1-877-ASK-FDIC) for help sorting it out.
What if I need more than the standard FDIC coverage?
If you are fortunate enough to have enough cash in the bank to need more coverage, you can expand the coverage by opening accounts at different FDIC- insured banks and maintain balances under the coverage limit. Keeping track can become a chore, so some institutions do the work for you. Big financial firms like Vanguard and Fidelity offer brokered CDs, issued by banks for clients of brokerages and investment firms, which let investors hold certificates from multiple insured banks.
And some banks participate in networks that distribute the cash among multiple institutions. One network, IntraFi, works with thousands of banks. Ask your bank if it is a member or search for participating institutions on IntraFi’s website. Financial technology companies providing similar services include the online wealth adviser Wealthfront, which offers a cash account paying 4.3% and FDIC coverage of up to $ 3 million by “sweeping” deposits into insured accounts at partner banks.
How can I avoid early withdrawal penalties with CDs?
The best way to avoid penalties is to be sure you don’t need the cash before the term of the CD ends. But you should also check the fine print before you open the CD, Tumin said, to make sure its penalties seem reasonable if you want to withdraw your money early. Some banks offer modest penalties — a few months of interest, say — while others may charge as much as 18 months or more for longer- term CDs. If you find a CD with a good rate, but it has a stiff withdrawal penalty, he said, it may make more sense to go with a saving account that has a slightly lower rate but won’t lock up your money.