3 Unexpected Benefits of Choosing CDs Over Other Savings Accounts

There are some well-known perks to putting your money in a certificate of deposit (CD). For example, if you use a 5-year CD, you get the same interest rate for five years. This is a major advantage over money market and savings accounts, whose interest rates can (and do) change over time.

However, there are some benefits of using CDs that you might not know or might not fully appreciate. If you're deciding whether to put your money in a CD or another type of account like a money market or high-yield savings account, here are a few things to keep in mind.

1. Comparably higher rates

CDs not only let you lock in your interest rate for a set amount of time, but they typically offer higher rates than savings or money market accounts do.

Rates offered by banks fluctuate over time, but as of Jan. 7, 2024, you can find a high-yield savings account with an annual percentage yield (APY) as high as 5.30%. Some of our top money market accounts combine a high yield with features like check-writing privileges with an APY of as much as 4.75%. Meanwhile, you can find a 1-year CD with an APY of as much as 5.55%.

2. You might be able to get income during the CD term

It's a common misconception that money in a CD cannot be withdrawn without penalty under any circumstances. While this is generally true when it comes to your initial deposit, several of our favorite banks allow account holders to withdraw their interest income at any point, without penalty.

For example, let's say that you open a 5-year CD with a 4% APY, and you deposit $10,000. During the first year, the account will earn $400 in interest income. If your bank allows you to withdraw interest income, you are free to take that out if you choose to do so. In fact, this is a common strategy used by retirees to generate predictable income. Of course, you can also leave the account alone so the interest compounds, but it's important to be aware that this option exists.

LendingClub is one example of a bank that allows high-yield CD customers to withdraw their earned interest. Barclays is another one. There are several others, so keep this in mind when you're looking into the best CD providers if earning income is a priority for you.

3. Can invest in CDs through retirement accounts

Under normal circumstances, the interest you receive from a CD account is taxable. But it's important to realize that many of the top brokers offer the ability to put money in a CD through an individual retirement account, or IRA, which can give you the benefit of risk-free income, but without the tax burden.

To be sure, using CDs in retirement accounts isn't right for everyone. Retirement savings generally cannot be withdrawn before the age of 59 1/2. But if you're thinking about putting money in CDs that you won't need for the foreseeable future, looking into a broker that offers CDs, such as Vanguard, can be a smart idea.

Should you use a CD or other savings account?

Of course, there are some major drawbacks of CDs, particularly when it comes to financial flexibility. If you might need your money soon, a CD probably isn't the right place for it -- for example, it's generally not a good idea to put your emergency savings into a 5-year CD.

However, if you won't need the money, CDs can be a great idea, especially if you want to maximize yield, or if generating income or investing for retirement are at the top of your priority list.