CD Rates Are Near Record Highs. 3 Reasons You Still May Not Want to Buy One

Certificates of deposit (CDs) are a safe investment, and right now, they provide a pretty good return. There are a variety of CDs out there offering rates above 5.00%. That's pretty impressive, considering rates were below 1.00% during the COVID-19 pandemic and top rates were around 3.00% or less in the pre-pandemic era.

So, should you jump onto the CD train and open one at these great rates? Not necessarily. There are three reasons you may still want to opt out.

1. You don't have any money you can tie up

The most important thing to realize about CDs is that they're a commitment. Your CD will come with a term (usually between three months and five years). If you take your money out early, there are penalties -- often substantial ones amounting to several months (or longer) of earned interest.

So, if you don't have extra money you can commit to keeping locked away for at least a few months or a few years, you'll have to pass on this investment. There's no point in opening a CD, only to have to pull your money out early and get stuck with the penalties.

Before you commit your funds, think carefully about whether anything could happen that would change your timeline. For example, if you decide to open a CD with money you've been saving for a vacation in a year, what happens if a really great deal comes along and you can't book it because your cash is locked up?

2. There's not a huge difference between the best CD rates and the best savings account rates

Many high-yield savings accounts offer similar or even better rates compared with CDs. In fact, The Ascent's list of the best high-yield savings accounts has options paying yields as high as 5.36% right now with no minimum balance requirements.

Rather than opening a Synchrony Online CD with a 6-month term paying 4.80%, you could:

• Open a Western Alliance Bank High-Yield Savings Premier account paying 5.22%, as long as you can meet the $500 minimum opening requirement.
• Open an EverBank Performance℠ Savings account paying 5.15% on all balances with no minimum opening requirement and no minimum balance requirement.

These accounts don't require you to lock up your money -- you can take it out whenever you want. And you can still earn the same or better yields as CDs are offering.

Now, the risk of these accounts is that the rates can fall any time because they are variable-rate accounts. CDs guarantee your yields for the duration of the CD term. But recent data showed inflation remained high in March, so the Federal Reserve is not likely to cut interest rates any time soon. So it's likely that savings account rates won't fall for a while.

3. You can still earn more in the market if you're investing with a long time horizon

The stock market remains a better place for your money than CDs if you won't need it for at least five years.

Historically, the S&P 500 has consistently produced 10% average annual returns. CD rates aren't even close to that (and most likely won't ever be). The S&P is a financial index that tracks the performance of 500 of the largest U.S. businesses. It's a pretty low-risk investment.

Now, you don't want to buy shares of an S&P 500 fund if you have a very short investing timeline. That's because, while it does provide consistent returns, it has some up years and some down years.

However, if you're leaving your money alone for at least five years, odds are good you'll walk away with more than if you'd invested in a CD, because you'd have long enough to wait out downturns.

You can open a brokerage account online within a few minutes and get your money into an S&P 500 index fund with no investing knowledge at all. Check out our list of the best brokers for ETFs to see your options. Robinhood is an especially good choice because you can get started with as little as $1, find ETFs easily using its mobile app, and pay no commissions on trades.

As you can see, opening a CD may not be the smart financial move you might have thought -- even though rates are high. Before putting money into one, carefully consider these three reasons why you might want to take a different approach.