I'm Giving Up a 5.05% CD Rate for a Rate of 4.5% Instead. Here's Why (2024)

If you're like me, you get a little thrill every time you snag a great deal or save money. It's a good feeling to sign a loan at 6.2% right before rates climb to 6.5%. Similarly, it feels awesome to stumble across a random supermarket sale that brings the cost of your favorite cereal down to $3.29 from the usual $4.99 per box.

Because I love getting the best deals in the context of financial products, I've been known to spend a lot of time researching certificate of deposit (CD) rates. I did that last year when I had some spare cash to put into a CD, and I've done it again this month.

During my research, I found some CD rates at a lesser-known bank that I'm pretty happy with. But I'm intentionally not chasing the highest rate this bank is offering for one big reason.

When it pays to give up the higher rate

A bank I already have a CD at is currently offering a 5.05% APY on a 12-month CD, versus a 4.50% APY for a 60-month CD. Trust me when I say that I'm really tempted to take the 5.05% and run with it.

While you'll find a number of 12-month CDs being offered at just above 5.00% today, I don't expect that trend to last much longer. So I know that if I want a CD at over 5.00%, I have to act quickly, and I'm probably looking at a 12-month term or something in that vicinity. However, the 60-month CD at 4.50% makes a lot more sense for my personal situation, even though it comes with a lower rate.

Right now, I'm aggressively trying to save for college because that milestone is not so far away for my oldest child. Since I have most of my college savings in stocks, I want to put some money into cash in case the stock market performs poorly in the coming years and I don't have time to ride out a downturn as tuition bills start to come due.

My aim is to put enough money into cash to cover two to three years of college tuition. This allows me that much time to ride out a stock market decline. It also explains why a 60-month CD at 4.50% makes more sense for me. I'd rather accept a slightly less competitive rate on my money but know that I'm still locking in a pretty decent rate for five full years. If I go with the 12-month CD, sure, I get 5.05% -- for now. But what happens in a year from now? Since I'm looking at a five-year goal, it makes sense to have my CD's term match that time frame.

It's a good time to open a longer-term CD

It's not easy to commit a chunk of money to a longer-term CD. But here's the thing: The reason CD rates are so high right now is because interest rates are up in general following the Federal Reserve's series of interest rate hikes that took place in 2022 and 2023.

The Fed is expected to start cutting rates later this year, though. Once a few of those rate cuts take hold, you may be hard-pressed to find a CD paying 4.50%, let alone 5.00%. So the way I see it, it also makes sense to open a 60-month CD now at a strong rate that's not the highest because that same rate may not be available for many years once the Fed starts to make a move.

To put it another way, yes, I'll lose out on a bit of interest in the next 12 months by choosing a 60-month CD over a 12-month CD. But all told, I'm confident I can earn more money in interest all-in with a 60-month CD than a series of five consecutive 12-month CDs based on where I think interest rates are going.

So again, if you're like me and enjoy getting the best deals, you may want to look past the numbers on your screen and instead consider the big picture. Forgoing a 5.05% APY in favor of 4.50% might seem like you're losing out at first. But in the long run, you could come out a serious winner.

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I'm Giving Up a 5.05% CD Rate for a Rate of 4.5% Instead. Here's Why (2024)


Is 4.5 CD rate good? ›

And, with the prospect of early withdrawal penalties high, you'll likely be better incentivized to leave your money untouched for the full CD term. For all of these reasons, opening a 5-year CD with a 4.5% interest rate could make sense for you now.

Is it worth putting money in a CD right now? ›

If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.

Should I lock in a CD now or wait? ›

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

Are CD rates expected to go down in 2024? ›

"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."

Should I break my CD for a higher interest rate? ›

Getting a CD when rates are low and breaking it when rates are high might be an opportunity to benefit from a higher-rate CD and earn you more than you would gain otherwise. A savings account is a place where you can store money securely while earning interest.

Is 4.5% interest rate good for savings? ›

Savings accounts that earn more than 4% annual percentage yield are high-yield, meaning they help your money grow faster than an average savings account.

Should I wait to put money in a CD? ›

CD rates are at a 3-year high—but waiting longer to buy could be a gamble. Interest rates on certificates of deposits (CDs) have been increasing substantially since 2022—in lock-step with the Fed's rate hikes. The national deposit rate for 5-year CDs is 1.39%, up from less than 0.50% in June 2022.

Why am I losing money on CD? ›

Early Withdrawal Penalties

The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.

Why shouldn't you invest all of your savings in a CD? ›

The roles of CDs in your portfolio

They offer a guaranteed return over a set period with no chance of market-based losses. In exchange, they offer less liquid access to your cash than a savings account and lower long-term returns than the stock market. For this reason, CD accounts shouldn't take up all your money.

Can you get 6% on a CD? ›

You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.

Do you pay taxes on CD interest? ›

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

What is a disadvantage to putting your money into a CD? ›

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.

Where can I get 7% interest on my money? ›

7% Interest Savings Accounts: What You Need To Know
  • As of May 2024, no banks are offering 7% interest rates on savings accounts.
  • Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.

How high could CD rates go up? ›

While the federal funds rate climbed steadily in 2022 and 2023, rates have flattened and are expected to fall at some point this year. The CME FedWatch Tool, which measures market expectations for federal funds rate changes, shows that most experts expect rates to sit between 4.50% and 5.25% by December 2024.

What is the best CD rate for $100,000? ›

Compare the Highest Jumbo CD Rates
InstitutionRate (APY)Minimum Deposit
GTE Financial5.38%$100,000
Credit One Bank5.35%$100,000
Third Federal Savings & Loan5.25%$100,000
CD Bank5.25%$100,000
13 more rows

What is considered a good rate for CD? ›

Right now, the best CD rates range from 4.00% to over 5.50% APY, which is much higher than what CD rates were just two years ago.

What does 4.5 interest mean? ›

The 4.5% annual interest rate translates into a monthly interest rate of 0.375% (4.5% divided by 12). So, you'll pay 0.375% interest each month on your outstanding loan balance.

What does 4.5 interest mean on Cash App? ›

Cash App has announced a new high-yield savings feature that lets its Cash Card users earn an interest rate of 4.50%. The announcement was made Feb. 15, 2024, on X (formerly Twitter). The catch is that to earn the high yield, users will need to receive direct deposits of at least $300 each month.

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