Putting your money away in a savings account is back in fashion as the Federal Reserve has been steadily raising interest rates since March 2022, and one of the most attractive options is a CD account. Though a big question many have is whether to go for a 1-year vs. a 5-year CD account.
"One-year CDs can be good for a number of reasons — short-term savings, CD ladders, savings for a known spend in a year," Marco Rimassa, CFP at CFE Financial, told Kiplinger. "Five-year CDs are a bit more specialized as an investing tool because there is some risk of locking into a rate that doesn't adjust with interest rate changes over this time. They can be good as part of a CD ladder, but they are also good to fix payouts for those looking for 'fixed' income, such as retirees or more conservative investors."
Read on for more on the differences between the two.
Why are CD accounts attractive right now?
Savings accounts tend to be hugely influenced by the direction of interest rates. Since the Federal Reserve has been steadily lifting rates, savings rates have risen as well.
In fact, many who would have automatically invested their money in the stock market in the past will have noticed savings are becoming a good alternative way to grow their wealth. They are virtually risk-free, so are great for those who are more cautious or want to avoid market volatility.
Gone are the days of only a few months ago where the top-paying accounts came with miserly returns. You can now get more than 5% on your hard-earned dollars.
CDs, or certificates of deposit, are one of a number of forms of savings accounts, along with the best high yield savings or best money market accounts. To find the best CD rates, you can use our tool below, powered by Bankrate.
What is a CD account?
A CD account is a simple savings account where the rate paid is fixed for the term, which is usually between one and five years.
Your money is locked away unless you are prepared to pay a fee to withdraw it early, so CDs are not suitable for someone who needs access to their cash in the shorter term or who is not 100% sure they can lock the money away for the full duration.
1-year vs. 5-year CD accounts — which are best?
Both 1-year and 5-year CDs are popular choices, although you can also get 3-year CDs or CDs for less than a year. The longer the term, the higher the rate tends to be, though given you tend to pay penalties for taking your money out early, it may be a false economy to go too long.
When making the choice, you are trading access for the rate. Say you plan to buy a car in three years, and will use the money in a CD account to do so; in that case, there is little point in opening a 5-year CD account.
Our savings calculator tool can help you work out how much you’ll earn in interest from a CD account.
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