CDs vs. High-Yield Savings Accounts: Which One Should You Choose?

Larry, Managing Editor

CDs vs. High-Yield Savings or certificate of deposit vs high yield savings accounts

How do you choose whether a Certificate of Deposit or a high-yield savings account (HYSA) is a better spot to keep your money? In a nutshell, choosing between CDs vs. high-yield savings comes down to your preference for flexibility around withdrawals and which one offers higher interest rates.

CDs offer a fixed rate of return and higher interest rates than traditional savings accounts, making them suitable for specific goals and long-term savings. However, they come with penalties for early withdrawal and require a set amount of money to be held for a fixed time period.

On the other hand, high-yield savings accounts provide flexibility for withdrawals, no term length, and higher than average APY on deposits. They are ideal for short-term savings goals and emergency funds.

The 8 Factors to Know Whether CDs vs. High-Yield Savings Accounts is Right for You

The first thing most people will consider is the interest rate. Which one pays higher yield: a CD or a high-yield savings account? However, we suggest investors evaluate a number of other factors.

We have summarized the eight most important things to consider when deciding between the two:

  1. Interest rate: Compare the interest rates offered by both options. Determine which one offers a higher rate of return on your investment.
  2. Liquidity: Consider how easily you can access your funds. High-yield savings accounts generally offer more flexibility and allow you to withdraw your money at any time, while CDs usually have a fixed term and penalties for early withdrawals. Brokered CDs can be sold early on the secondary market but may be less than what you originally paid for.
  3. Investment duration: Evaluate your investment horizon. If you have a specific timeframe for your savings goal, a CD with a fixed term may be suitable. However, if you require more flexibility and access to your funds in the short term, a high-yield savings account may be more appropriate. Also, consider a CD ladder if you want the best of both worlds.
  4. Initial deposit requirements: Determine if you have a significant amount of money for an initial deposit. Some CDs may require a higher initial deposit than high-yield savings accounts. Brokered CDs typically have a minimum investment of $1,000, although Fidelity has introduced fractional CDs which only require an investment of $100.
  5. Risk tolerance: Assess your risk tolerance level. CDs are generally considered low-risk investments, as they are backed by FDIC insurance. High-yield savings accounts also carry minimal risk. 
  6. Penalties for early withdrawal: Understand the penalties associated with early withdrawal. Traditional CDs typically impose penalties for withdrawing funds before the maturity date. Evaluate if you can afford to tie up your money for the CD’s duration without needing access to it. Brokered CDs do not have an early withdrawal penalty, and can be sold early on the secondary market.
  7. Account fees: Consider any fees associated with the accounts. Some CDs and high-yield savings accounts may have maintenance fees or transaction fees. Compare these fees to ensure you choose the option with the lowest costs.
  8. Savings goals: Define your savings goals and priorities. If you are saving for a specific purpose or have a long-term goal, a CD may offer higher interest rates and the potential for greater returns. However, if your goal is to build an emergency fund or have easy access to your money, a high-yield savings account may be more suitable.

How Does a High-Yield Savings Account Work?

A high-yield savings account is a type of savings account that offers a higher annual percentage yield (APY) on deposits than traditional savings accounts. This means the interest earned on your savings can be significantly greater than a regular savings account.

High-yield savings accounts are typically offered by online banks and financial institutions, allowing them to provide competitive interest rates due to lower overhead costs.

These accounts are ideal for individuals looking to earn more on their savings without taking on much risk. They offer flexibility in terms of withdrawals and accessibility, making them suitable for short-term goals or emergency funds. However, it’s important to note that the interest rate is not guaranteed forever and can fluctuate with market conditions.

What Is a CD and How Does It Work?

A CD, also known as a Certificate of Deposit, functions as a secure financial instrument with a fixed term and interest rate. When you open a CD, you agree to deposit a specific amount of money for a predetermined period of time. In return, the bank pays you interest on your deposit.

CDs typically offer higher interest rates than traditional savings accounts, making them an attractive option for those looking to grow their savings over time. However, it’s important to note that CDs have penalties for early withdrawal and are not ideal for emergency funds. They are better suited for saving towards specific goals or long-term savings objectives.

By locking in the interest rate when you open the CD, you can protect your earning potential even if rates go down in the future. Comparing interest rates, withdrawal penalties, and time commitment is crucial when considering opening a CD.

Why You Should Consider Brokered CDs Instead of Traditional CDs

Brokered CDs, offered by brokerage firms, provide investors with the opportunity to purchase certificates of deposit from multiple banks and consolidate multiple CDs into a single brokerage account for enhanced liquidity and potentially higher interest rates.

Investors buy brokered CDs to get access to more maturities and higher rates compared to traditional bank CDs. By purchasing brokered CDs from multiple banks, investors can also expand their FDIC coverage.

Here are some key features of brokered CDs:

  • Higher interest rates compared to traditional bank CDs
  • Enhanced liquidity through the ability to sell on the secondary market without penalties
  • Convenience of consolidating multiple CDs into a single brokerage account
  • Possibility of longer terms, up to 20 or even 30 years
  • FDIC insured up to $250,000 per bank per depositor

We generally suggest investors buy brokered CDs over traditional CDs due to higher rates, more maturity terms making it easier to build a CD ladder, and greater flexibility and convenience of buying multiple CDs from one brokerage. In addition, the expanded FDIC insurance coverage is also a nice layer of protection.

Which One Offers Higher Interest Rates: CDs vs. High-Yield Savings Account?

In our experience, brokered CDs will generally offer the highest rates, followed by high-yield savings accounts, then traditional CDs and savings accounts. 

We suggest checking the latest CD rates on each brokerage, which we update regularly.

What are the Risks of Brokered CDs vs. High-Yield Savings Accounts?

Brokered CDs and high-yield savings accounts have their own set of risks that investors need to be aware of.

With brokered CDs, the main risk lies in the possibility of a decline in interest rates. If rates decrease, investors may find themselves locked into a lower interest rate for the entire term of their CD. Additionally, brokered CDs can be illiquid, meaning it may be difficult to access funds before the maturity date.

On the other hand, high-yield savings accounts often pay rates that frequently change, unlike the fixed rate that brokered CDs pay. In addition, you should always check whether the bank offering the high-yield savings account is FDIC-insured.

CDs vs. High-Yield Savings Accounts: Deciding Which Is a Good Fit For You

When choosing between a brokered CD and a high-yield savings account, the first thing to consider it the return and interest rate you’ll be earning. Then, decide whether you prefer a fixed rate and term that a CD offers. Or, perhaps you need to withdraw cash every month, which most high-yield savings accounts offer, up to a certain point. CDs and high-yield savings accounts will almost earn you more interest income than ordinary bank savings accounts.

In addition, there are other investments to replace your cash including the ultra-safe U.S. government-issued Treasuries, money market funds, and other cash equivalents such as ultra-short-term ETFs. All these are better than leaving your cash sitting in your bank!