Are CDs a good savings product? A helpful guide
Wondering if CDs are a good savings vehicle? For conservative savers, they can be an attractive option. Certificates of deposit (CDs) are low-risk, FDIC-insured savings products offering a predictable interest rate over a set period of time. They can be ideal for short and mid-term savings because they help you grow your money without the ups and downs of the stock market.
Whether you want to diversify your retirement savings or need a secure place for your cash, you might consider CDs as a savings option.
Are CDs a good product right now?
CDs can be a good savings product for those who want to lock in guaranteed interest rates amid market uncertainty. While they can’t match the potential gains you get with stocks, CDs can provide peace of mind and reliability compared to other investment vehicles.
If you don’t need immediate access to your money, CD accounts can offer a straightforward way to earn more than a traditional savings account. Plus, their fixed rates deliver predictable growth, so you know exactly how much you’ll have at the end of the term.
How to contribute to CDs?
Contributing to a CD involves depositing a fixed amount of money for a set term — which can last anywhere from a few months to several years. In exchange for your contribution, the bank or credit union pays you a fixed interest rate. This is usually expressed as an annual percentage yield (APY) and shows you how much your CD will earn over a year (including any compounding). Longer CD terms may offer higher APYs.
When you contribute to CDs, you agree to keep your funds in the account until the maturity date. Withdrawing early can incur penalties that reduce or eliminate your interest earned. At maturity, however, you receive your original deposit plus any interest.
Whether held at a bank (FDIC-insured) or credit union (NCUA-insured), CDs can protect your principal and give you a secure way to grow your savings.
Certificate of deposit pros and cons
Like any financial strategy, contributing to CDs has its pros and cons. Here are the major ones to consider.
Pros
Safety and FDIC protection
CDs are a low-risk way to save, as the Federal Deposit Insurance Corporation (FDIC) protects up to $250,000 per depositor for all eligible deposit accounts. Along with that, many CDs come with fixed interest rates to provide more predictable growth.
Higher rates than traditional savings accounts
The national average interest rate on traditional savings accounts is just 0.40% APY, while a 12-month CD sits around 1.64% APY at the time of writing this article.
At major U.S. banks, CD rates range from 1–4%, depending on the term and deposit amount. In comparison, standard savings accounts often offer sub-1% rates, sometimes as low as 0.01%.
Multiple CD structures (no-penalty, bump-up, jumbo)
Most CDs have fixed interest rates and early withdrawal penalties, but some offer extra flexibility. No-penalty CDs let you withdraw early without a fee, while bump-up CDs allow you to raise your interest rate if market rates go up. Jumbo CDs also can provide higher rates for larger deposits.
CD laddering for liquidity management
CD laddering is a common financial strategy where you divide your money across CDs with staggered maturity dates. This can give you rolling access to your funds and help avoid early withdrawal penalties. In addition, a CD ladder lets you benefit from short and long-term interest rates. As each CD matures, you can reallocate at current rates or use the money as needed.
Are CDs exposed to market volatility?
CDs insulate your principal from the market so a downturn won’t put your money at risk. Many CDs also have fixed rates so falling interest rates won’t affect your growth.
Cons
No additional contributions after opening
Traditional CDs typically require you to deposit the full amount upfront, unlike other products that allow ongoing contributions. You can add more funds at maturity or by acquiring an additional CD.
Limited liquidity and early-withdrawal penalties
CDs limit how quickly you can access your money. Many banks charge early withdrawal penalties, sometimes as much as a year’s worth of interest. These fees can be really costly if you need cash for an emergency or want to invest elsewhere.
Inflation and purchasing-power risk
Although CDs provide predictable interest growth, their rates don’t always outpace inflation. For example, if your CD earns 2% while inflation climbs to 3.5%, your interest won’t keep up and your money will lose purchasing power by the time the CD matures.
Lower long-term growth than market investments
Other savings and investment options can earn more than CDs. High-yield savings accounts may offer rates that match or exceed CDs, although that rate is not locked in and is subject to change. Stocks, while riskier, can generate much higher long-term returns.
Potentially higher minimum deposits
Some CDs require a relatively large opening deposit, which makes them less accessible for investors who are just starting out or who don’t want to lock away a big sum at once.
Taxation of yearly interest
CD interest is usually taxable in the year it accrues, even if you don’t withdraw until maturity. This means you could owe taxes before you ever receive any cash.
When do CDs make sense?
Bank CDs can be a good savings product if your financial goals prioritize safety, predictability, and a clear timeline. They typically work best if you know exactly when you’ll need your money and want to avoid the uncertainty of market-based investments.
When CDs may be a good fit
Many people put money in a CD when saving for a short- to mid-term goal, like a home down payment. You might also contribute to a CD if you need guaranteed interest growth and have a set withdrawal date. For those who want to avoid market risk and take advantage of temporarily high rates, CDs can offer a safe way to grow your money.
When CDs may not be the best option
CDs aren’t always worth it if you need frequent access to your money or you want a more flexible contract. Likewise, they’re not ideal if you’re primarily investing for retirement — where growth-focused investments are typically a better choice. When you’re comfortable with market risk (or interest rates are low), other options can give you higher returns and more liquidity.
What do annuities offer compared to CDs?
Annuities are a compelling alternative to CDs, providing a balance of safety and stronger earning potential.
Interest rates
CDs: Most CDs pay fixed interest rates that are lower than annuity rates. Variable-rate CDs track a benchmark, like the federal funds rate, so your earnings will likely drop if overall interest rates go down.
Annuities: Each type of annuity has its own interest structure:
- Fixed annuities: Interest rates are consistent throughout the contract term.
- Variable annuities: Account performance is based on market fluctuations of underlying subaccounts.
- Indexed annuities: Interest rates are linked to the performance of an index fund. When the index performs well, your earnings increase – up to a stated limit. If interest rates fall, there’s a minimum guarantee to protect your principal.
Tax considerations
CDs: You typically pay federal and state taxes every year on the interest earned, even if your CD account didn’t reach its maturity date.
Annuities: Annuities can offer more control over when you pay taxes:
- Non-qualified annuities use after-tax dollars so when you take withdrawals, you only pay taxes on the earnings, not your original principal.
- Qualified annuities use pre-tax dollars, allowing your contributions to grow tax-deferred. When you withdraw funds, you pay income tax on the principal and the earnings, which can be beneficial if you’ll be in a lower tax bracket in retirement.
- Non-taxed deferred annuities tax your interest growth annually.
Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income. Because they are meant for long-term accumulation, most annuities have withdrawal charges that are assessed during the early years of the contract if the contract owner surrenders the annuity.
Withdrawal options at maturity
CDs: You can either take your money out or reallocate into a new type of account.
Annuities: Depending on the contract, you can take a lump sum, reallocate to a new contract or receive regular payments over a set period — and in some cases, for the rest of your life.
Plan with a Gainbridge annuity
CDs can be a predictable way to save, but they’re not the right fit for every investor. Annuities can offer higher growth potential, tax advantages, and flexible payouts designed to support your retirement goals.
With Gainbridge, buying an annuity is straightforward. You can purchase an annuity in typically under 10 minutes and manage your contract entirely through our online platform. If you want an option with guaranteed growth and full principal protection, consider the Gainbridge FastBreak™ annuity, that offers a fixed interest rate and streamlined structure.
Explore Gainbridge today to see how an annuity can help savers with stronger earning potential. And if you ever need assistance, our team of licensed agents is ready to help.
This article is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The Gainbridge® digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. CDs are deposit accounts offered by banks and credit unions, insured by the FDIC or NCUA. Annuities are an insurance product offered by an insurance company and are not FDIC or NCUA insured. FastBreak™ annuity is not a tax-deferred annuity. Because this annuity is not tax-deferred, you will not pay a 10% federal excise tax on any interest you withdraw before you reach age 59 ½. Withdrawals above the 10% free withdrawal amount are subject to a withdrawal charge and/or market value adjustment. FastBreak™ is issued by Gainbridge Life Insurance Company, a Delaware-domiciled insurance company with its principal office in Zionsville, Indiana and is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. Please visit gainbridge.com for current rates, full product disclosure and disclaimers and additional information.
FAQs
How much could a $10,000 CD make in one year?
Interest rates and compounding frequency both affect how much you could earn from contributing to a CD. Say you contribute $10,000 into a CD with a 3% interest rate compounding monthly. By the end of one year, you could earn $304 in interest.
Should I open a certificate of deposit?
If you want a safe, fixed interest rate and you don’t need immediate access to your money, a CD might make sense. They offer guaranteed interest and are FDIC-insured, which can make them an attractive option for conservative investors.
What are the downsides to CDs?
CDs have several drawbacks, including limited liquidity, early withdrawal penalties, and taxation of yearly interest. If you’re looking for flexibility and higher potential growth, you might want to consider other options.
