Opening a five-year CD means you’re willing to keep your deposit locked away for a few years in order to earn interest. But there are a few other factors to take into account.
Other savings options to explore
Over the past year, interest rates have climbed quickly, making CDs a good investment for some, Garza said. But most experts believe that CD rates are as high as they’ll go, especially since the Fed is holding rates steady for now. So if you’re interested in locking in a high five-year CD term, now’s the time to act.
But if you’re not ready to deposit a lump sum of money for years, there are other interest-earning savings options that may be a better fit for your goals.
“Interest rates are high, and it’s a good time to be a saver, but it’s not all or none,” said Marguerita Cheng, chief executive officer at Blue Ocean Global Wealth. “You can have a checking and savings account, but you can also have a CD, especially if the terms and minimums fit your needs.”
High-yield savings and money market accounts
Savings options with variable rates like high-yield savings accounts tend to offer more flexibility — you can deposit and withdraw money regularly without paying an early withdrawal penalty as you would with CDs. A high-yield savings account or a money market account are good options for storing emergency savings or money you need quick access to. You’ll still earn interest but won’t lock in a fixed rate. That means when rates drop, your savings APY likely will too.
Bump-up CDs
Some banks offer bump-up CDs, which let you adjust your APY once (or sometimes multiple times) to lock in a higher APY if rates rise during your CD term. This specialty CD may come in handy if you’re worried about missing out on better rates in the coming weeks. However, bump-up CDs generally have lower rates compared with traditional CDs.
So even though you’ll have a chance at a better rate, you may start with a below-average APY. And you’ll still pay an early withdrawal penalty if you take the money out before the term ends.
CD ladder
If you want a guaranteed fixed rate but want to get your money back sooner to take advantage of higher rates, consider a CD ladder. Here’s how it works.
You’ll spread your deposit across several CDs, usually one-, two-, three-, four- and five-year CD terms, so you’ll have money coming due annually. A ladder can be beneficial if there’s a chance you’ll need funds each year or if you think rates will continue to rise. You can also apply this strategy to shorter-term CDs.
Series I bonds
Lastly, Series I bonds are another safe investment option and are government-backed. I bonds are currently at 5.27% until April 2024. If you apply for one before then, you can lock in this rate for the next six months. But after that, the new rate may drop significantly. An I bond requires you to lock up your money for at least one year, but you should try not to touch your funds before five years, or like a CD, you’ll forfeit some of the interest you earned.
Treasury bills
Treasury bills are pretty similar to CDs, but there are some key differences. To start, both low-risk options still require a one-time deposit and limited liquidity.
You’ll have to get a treasury bill through the US Treasury Department and you won’t be able to withdraw funds unless you transfer it to a broker. On the other hand, CDs let you withdraw your money, but you’ll pay an early withdrawal fee if you take money out before the term ends.
Right now, five-year CD rates are on par with treasury bills, with a 4.67% APY as of Nov. 1. Though treasury bill rates update daily, rates have been hovering above 4% for months. While both are similar, you may have more options and flexibility depending on your goals for the money you’re setting aside.
How to open a 5-year CD
When you’re ready to open a CD, most banks let you open your account online. If a physical branch is available, you can also apply in person. You’ll need to provide some of your personal information, such as your full name, Social Security number or Taxpayer Identification number, physical address, and contact information.
When you complete the application, you’ll need a one-time deposit. Before opening your account, do the math to determine the return you want to determine your deposit amount using a CD calculator.
Lastly, check with the bank to see how you can make the deposit — most require an electronic transfer and don’t accept cash.
FAQs
You’ll pay an early withdrawal penalty if you withdraw money before your CD matures. You can forfeit between 180 and 365 days’ worth of interest on a five-year CD. The exact amount depends on your bank.
Yes. If you choose a traditional CD, you’ll have a fixed interest rate for your CD term. When your CD matures, you can roll the money into a new one with a better interest rate.
Unless you’re buying a CD offered by a brokerage account, CDs bought through a bank or credit union are insured by the Federal Deposit Insurance Corporation or National Credit Union Administration for up to $250,000 per person. Insurance also covers any interest compounded, making it a low-risk investment.
CD terms typically vary from three months to five years. Generally, CDs with longer terms of maturity pay higher interest rates. There are other safe savings accounts to consider, such as high-yield savings accounts or I bonds.
Methodology
CNET reviews CD rates based on the latest APY information from issuer websites. We evaluated CD rates from more than 50 banks, credit unions and financial companies. We selected the CDs with the highest APY for five-year terms from among the organizations we surveyed and considered rates for shorter terms if five-year terms were identical or unavailable.
Banks we reviewed
Alliant Credit Union, Ally Bank, America First FCU, American Express National Bank, Barclays, Bask Bank, Bethpage, BMO Alto, Bread Savings, Capital One, CFG Bank, CIT, CommunityWide Federal Credit Union, Connexus Credit Union, Discover, EverBank, First Internet Bank of Indiana, First National Bank of America, Forbright, Lending Club, Limelight Bank, Marcus by Goldman Sachs, MYSB Direct, NexBank, Popular Bank, Quontic, Rising Bank and Synchrony.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.
