CDs Offer Risk-Free Returns Above 5%. Here's Why They May Still Be a Bad Investment

CDs are currently paying pretty high yields. In fact, there are a lot of CDs to be had with rates above 5.00%. You'll take minimal risk if you open one from our carefully-curated list, since these CDs are all FDIC insured.

But, while you can get risk-free returns above 5.00% today, CDs still aren't a great investment for most people. Here's why.

CDs aren't always great for long-term investors

When you buy a CD, you'll find out your interest rate upfront. It's guaranteed for the CD term. It won't change, even if market conditions do.

Unfortunately, even though rates are pretty high right now, the rates CDs offer are still well below what you could make with other investments, like an S&P 500 index fund. Your interest rate on your CD is capped at the rate when you bought it, so even if you get a CD paying 5.00%, you're limiting your potential returns to about half of what the S&P 500 has reliably provided over the last several decades.

Now, accepting a lower CD rate because CDs present almost no risk of money loss can make sense, because there is some risk to stock market investing. But the S&P 500 has a really consistent track record for long-term investors. If you have a long enough investing timeline (five or more years), odds are that you won't lose money and you'll instead earn somewhere around the 10% average returns the S&P 500 has paid for decades.

Plus, CDs are unlikely to pay 5.00% or higher forever. There are already 20% fewer CDs providing these yields than there were just a few months ago. And while your rate is guaranteed for the CD term, once that term expires, you could find yourself earning much lower yields.

This means they really aren't a great long-term option if your goal is maximizing your returns over many years.

CDs aren't always great for short-term investors

For one thing, you have to agree to lock up your money -- usually for at least three months and for as long as five or 10 years, depending what CD term length you pick. So, if you're a short-term investor and will need your money really soon, a CD isn't a good place for it.

In an ordinary market, you'll also get lower rates for CDs with shorter terms. That's not the case right now. Because interest rates are so high and expected to fall soon, shorter-term CDs are temporarily paying more than longer-term ones. Once economic conditions stabilize, though, it's almost certain you'll have to accept a much lower yield if you only want to invest for a few months' time.

These yields may not be much different from what you can get in a savings account that keeps your cash more accessible.

See, while high-yield savings accounts typically pay a slightly lower rate than CDs do, that's also not the case right now. Savings account rates are comparable to, or in some cases higher than, CD rates at the moment. That means, in the current climate, it really may not be worth putting your cash into a CD and giving up the liquidity savings accounts offer.

Even in a normal market, the discrepancy between high-yield savings accounts and CDs isn't usually huge. Giving up the access to cash that comes from using a savings account often isn't worth the small amount of extra interest income a CD may be able to provide. That will be especially true if, in the future, neither type of account offers the amazing rates available today.

Now, it's true that CDs lock in your rate while savings accounts don't. But if you're only buying short-term CDs lasting a few months to a year, you're still vulnerable to interest rate fluctuations, so this isn't a huge benefit worth giving up liquidity for either.

Should you invest in a CD anyway?

As you can see, there are some downsides to CDs and only limited upsides. Because of that, a CD really only makes sense in specific circumstances when you have money you're definitely OK with tying up for three months to five years, but definitely not OK with keeping invested any longer.

That's a pretty specific situation that most people won't find themselves in. If that's not your situation, check out the best high-yield savings accounts for short-term investing or open a brokerage account for your long-term investing needs, instead of choosing a CD.