Best CD Rates for February 2020

Finding the best CD rates can be complicated with the endless offers on the market. But you’ll quickly find the right CD for you by comparing rates from our hand-picked list. Check out our just released 2020 picks below to learn more.

The certificate of deposit (CD) is one of the most durable and popular banking products on the scene. It’s been a favorite option of many bank clients who are drawn to its simplicity, not to mention the attraction of earning an easy buck on their funds.

With the emergence of online banking, competition for consumers' savings has never been higher. You can get dizzy sifting through the galaxy of high-yield CD accounts available on the U.S. market today. The good news is that this competition has resulted in relatively high APYs compared to what has been available from traditional bank.

We’re here to help with a distillation of the best CD rates currently on offer. For those who are new to CDs or simply need a refresher, we’ll run through some of the basics, and the pros and cons of holding a CD account as well.

A certificate of deposit is a type of savings account that requires the account holder to leave their funds on deposit for a certain length of time. For this reason, CDs are also commonly called “time deposits.”

With a CD, you leave your money on deposit for a certain amount of time. In exchange, banks pay higher interest rates on CDs than they do on savings and interest-bearing checking accounts. CD interest rates are generally expressed as annual percentage yield, which shows the annual interest account holders receive.

To be perfectly clear, you aren’t prohibited from withdrawing your money early from a CD. However, if you do withdraw your money early, you’re likely to face an early withdrawal penalty -- generally a certain number of months’ worth of interest.

There are some subtypes of CDs that are also worth knowing about:

• Jumbo CDs: This refers to CDs with more than $100,000 in the account. This often entitles the depositor to a higher interest rate than a standard CD. Since jumbo CDs represent a lot of guaranteed money, banks are typically willing to pay a bit more.
• No-penalty CDs: Some banks offer CDs that don’t charge early-withdrawal penalties. It’s important to realize that this essentially makes them high-yield savings accounts. Their interest rates are generally comparable with leading savings accounts (and lower than typical CDs).
• Bump-up CDs: Most CDs come with interest rates that are constant for the entire term. However, some banks offer bump-up CDs, which allow you to change your interest rate to the prevailing rate once during the term. For example, if you get a five-year CD with a 3.00% APY and a year from now your bank is offering five-year CDs with a 4.00% APY, you can exercise your option to switch to the new rate instead.

There are three main variables that determine CD interest rates: Prevailing market interest rates, the financial institutions offering CDs, and the maturity length of the CD.

Generally speaking, when short-term interest rates -- such as the federal funds rate -- increase, we can expect CD interest rates to rise.

Having said that, variance among financial institutions can be massive. Specifically, the CD rates offered by brick-and-mortar banks are typically far lower than those offered by leading online banks. It’s not uncommon to find smaller branch-based banks or credit unions that offer CD rates that are competitive with online banks. But large banks tend to offer the lowest rates in the industry.

Within each financial institution, the interest rates offered are typically highest for CDs with the longest maturities. For example, if you look at the CD rates offered by an online bank, you can generally expect a five-year CD to pay a higher APY than a one-year CD.

CDs typically pay interest to your account every month. And many banks give you the option of having your interest added to the principal balance or distributed to you.

There are advantages to both arrangements. If you add your monthly interest to your CD’s principal balance, your interest will compound over time and maximize your returns.

Imagine that you have $10,000 in a certificate of deposit account and you get $25 in interest this month. By adding it to the principal, your next interest payment will be based on $10,025. Initially, this doesn’t make a big difference, but it can have quite an impact over a period of several years.

On the other hand, if you want income from your CD, taking distributions could be a good way to create an income stream and take advantage of the high interest rates offered by CDs. This is an especially common option among retirees who need some income.

The best one-year CD among top banks is 2.10% APY of December, 2019. The best online savings account has an APY of 2.05% -- in the ballpark, but not as attractive. The best checking accounts trail by a large margin with at a 1.25% rate.

Of course, these will change over time and may be significantly different by the time you read this. But the general relationship between these three account types and their APRs is typical.

Of course, there’s a reason for this. Checking accounts are the least restrictive of the three main types of bank accounts -- you're free to withdraw money from the account as often as you’d like. Savings account allow withdrawals, but generally cap them at six per month. And CDs only allow withdrawals once the maturity date is reached.

As long as your CD is opened with an FDIC-insured bank, you don’t need to worry about losing money. However, you can lose money if you end up needing the money in your CD before its maturity date arrives.

Most banks have an early withdrawal penalty that requires the account owner to forfeit a certain number of months’ worth of interest. The number generally varies based on the term length.

For example, a bank might charge an early withdrawal penalty equal to three months of interest for CDs with maturity terms of three months to one year and 12 months of interest for CDs with maturity terms greater than one year. So if you need to withdraw your money very early in the account’s lifespan, you could take a loss.

There’s no such thing as a financial product that’s perfect for everyone, and CDs aren't an exception. There are advantages and disadvantages to consider before putting your money in a certificate of deposit.

Advantages of a CD

• Higher interest rates: CDs offer higher interest rates than comparable checking and savings accounts. As I write this, the best one-year CD APY is 0.5% higher than the best high-yield savings account.
• Fixed interest rate: This is both an advantage and a disadvantage. Your CD generally comes with an APY that stays the same for the entire maturity term, even if market interest rates drop. In contrast, if you put your money in a savings account, your interest rate can potentially fall, depending on market conditions.
• Risk-free returns: Assuming your CD is smaller than the FDIC insurance limit, it's essentially a risk-free account. It’s tough to find higher returns than CDs offer if you don’t want to take on any risk.
• No fees: Unlike some savings accounts, CDs generally don’t charge maintenance fees.

Disadvantages of a CD

• Fixed interest rate: This can be a good or bad thing. For example, if you get a five-year CD with a 3.0% APR and the bank’s five-year CD rate jumps to 5% a year later, you’ll still get the lower rate that you agreed to (unless you got a bump-up CD).
• Time commitment: When you open a CD, you commit to leaving your money on deposit for a certain length of time. If you need flexibility with your money, a CD might not be the best option for you.
• Higher minimums: CDs are more likely than checking and savings accounts to have a minimum opening deposit. These vary, but minimums in the $500–$2,500 range are common.

Unless you open your CD within a tax-advantaged retirement account like an IRA, the interest you receive from your CD is considered “interest income.” And that's taxable.

Legally, any interest you receive is taxable and needs to be reported to the IRS -- even if it’s just a few dollars. You generally won’t receive a tax form documenting your interest unless you earned more than $10 during the year, but you’re still required to report it.

The short answer is yes, but you don’t want to. Since a CD is meant to be a full commitment of funds over the accepted term, you’ll get socked with penalties if you decide to draw from the well.

These fines are usually considerable and typically consist of forfeiting a certain amount of interest. Here’s a sample of penalties for making an early withdrawal based on your holding period. These fees are more or less typical across the banking sector: