The window for securing a top-notch rate on a certificate of deposit (CD) may close soon, according to The New York Times. At the end of 2023, the Times gave the following verdict: “If you want to lock in more rates in your cash savings for the next year or so, now might be the time to do it. ” According to the Times, this is due to the fact that currently, “yields on federally insured certificates of deposit are the highest they have been in years,” and they are poised to “decline in the new year” if the Federal Reserve will follow. through potential interest rate cut plans.
But even if it appears true that now is the time to strike for the most competitive CD rates, that doesn’t automatically mean that CD investing is the right financial move for you. Here’s what to consider about CDs before you lock up your money.
Why invest in a CD?
CDs “offer the same primary protection as a savings account but often at a higher price,” as Fortune explains. With a CD, you agree to leave your money on deposit with a bank for a set amount of time, known as the term, which can range from three months to five years. Instead, “the bank pays a higher interest rate than you would get in a savings account,” according to Fortune.
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But unlike many investments, where you face the risk of loss due to a fluctuating and unpredictable market, a CD offers some protection, as well as a fixed rate. -lock for term. According to CBS NewsCDs are “among the safest investments because the Federal Deposit Insurance Corporation insures up to $250,000 of deposits (the National Credit Union Administration offers the same protection for credit unions).”
Ideally, you should make sure that you don’t need to tap the money you put into a CD before the term ends. Otherwise, you’ll usually pay an early withdrawal penalty.
When does it make sense to invest in a CD?
If you’re wondering if a CD is worth it at any point, it’s helpful to look at the Federal funds rate. CD rates generally track this rate, meaning that “when the Fed raises the Federal funds rate, banks raise interest rates on CDs to attract more depositors,” Fortune explained. .
However, according to Fortune, it is also important to consider the fact that the “IRS taxes CD interest at ordinary income rates.” In other words, “to know if CDs are worth it, you need to calculate your extraordinary return after taxes.”
Your financial need should also factor into your decision. Are you good at locking up the money for the agreed term, or do you think there’s a chance you’ll need it? There’s also the fact that while CDs offer relative safety and generally higher rates compared to savings accounts, their “returns are often lower compared to stocks and ETFs,” he notes. Bankrate.
When is a CD unreasonable?
For one, “CDs may not be worth it when interest rates are low,” because “in these environments, conservative investors often do better with other fixed-income securities, such as municipal or corporate bonds,” according to Fortune.
You’ll also want to reconsider if a CD doesn’t seem like it fits your financial goals. Because CDs don’t provide as many returns as other investments, “they may not give you the returns needed to build wealth for retirement over time,” points out Bankrate.
You can also pass on a CD if you think you will need the money you deposited in the near future. According to Fortune, “tacking a CD early can have a penalty that wipes out all your returns — and more.”