Make the Most of Rising CD Rates

As the Federal Reserve hikes interest rates, banks have been more generous in boosting yields on short-term certificates of deposit than on other types of deposit accounts. Even brick-and-mortar institutions—which lag internet banks when it comes to pushing up rates on deposit accounts—are loosening the CD purse strings.

Recently, with a $5,000 minimum deposit you could earn as much as 2.5% on a nationally available one-year CD, compared with 2% on a money market deposit account. Or, with a deposit of only $500, a one-year CD from Marcus by Goldman Sachs yields 2.2%. If the published rate on the Marcus CD rises within 10 days after you open an account, you’ll get the higher rate as long as you fund the CD in that period.

But investing in a CD now locks in your money at today’s rate. As the year passes, rates on savings and money market accounts are bound to keep rising. (Kiplinger expects the Fed to increase short-term rates by a quarter percentage point two more times this year and three or four times next year.) As a result, total earnings over a year with a top-yielding savings or money market account will likely be close to that of a high-yielding one-year CD, says Ken Tumin, of DepositAccounts.com.

Still, you may favor the guaranteed yields that certificates of deposit provide—especially if you don’t plan to move your money in pursuit of higher rates. If you think you may cash out early, look for CDs with minimal early-withdrawal penalties. The Ally Bank 12-month High Yield CD recently offered 2.15% with a minimum $5,000 deposit, or 2.25% on a deposit of $25,000 or more, with an early-withdrawal penalty of only 60 days’ worth of interest.