Best Online CD Rates for 2020

Your good-old savings account may not provide a high return on your money, but you know that your savings are insured and safe. What if you could have the safety of a savings account and earn a higher return on your money? A Certificate of Deposit (CD) is an account in which you deposit money for a fixed length of time, in order to earn a fixed or variable rate of return. Although a CD is considered a short-term investment, early withdrawal penalties apply, so you will want to invest money you do not need in the near term. The term may range from one month to five years. Just as with savings and checking accounts,CDs issued by banks and credit unions are insured for up to $250,000. Generally, CDs pay a lower rate of interest than higher risk investments that are not guaranteed against loss. The rates you see on this page are among the best CD rates available at this time.

Certificates of Deposit vs Bank Accounts

Here’s how CDs and Savings accounts differ

• With a savings account, you can deposit and withdraw funds whenever you like. A CD is a time deposit. You make a deposit and leave it untouched until the maturity date. In exchange for leaving your money until the maturity date, you are paid a higher interest rate. If you do want to withdraw money from a CD, you will be charged a high penalty fee.
• Most CDs pay a fixed interest rate, locking you into a rate for the life of the term. The interest rate paid on a savings account may be fixed or vary with market conditions.

Here’s how CDs and Checking accounts differ

• A checking account has all the features of a savings account. An important difference is you can make payments with checks and withdraw money with debit/credit cards at any time. In exchange for the ability to access your money at any time, banks pay lower interest rates on checking accounts than savings accounts or CDs.
• Like a savings account, money in a checking account is immediately available, whereas a CD locks in the money for typically six months to five years, although the term could be for a shorter or longer period.

Certificates of Deposit vs Stocks

Here’s how CDs and Bonds differ

• Both CDs and government bonds are safe haven investments. They are in essence low risk, low interest rate loans that pay an interest rate on a principal sum. When you purchase a CD, you become a lender to the issuing bank, and with a bond to the government. CDs are short-term savings vehicles, whereas bonds can be short, medium or long term; 20- and 30-year treasury bonds are commonly placed in retirement portfolios.
• The value of CDs and bonds move in the opposite direction when interest rates rise or fall. An increase in interest rates increases the average rate paid on CDs. If you sell your bond on the secondary market, it could sell for less than the face value. Nonetheless, at maturity, the bond will be redeemed at face value.

Here’s how CDs and Stocks differ

• Stocks have high market risk. A stock investor can lose a portion or all of his principal investment sum when the share price falls below the purchase price. Investments in fixed income securities (CDs, bonds, treasury securities), on the other hand, do not lose the principal amount. The return is based on the interest rate paid. The investor is exposed to interest rate, inflation, and reinvestment risk.
• If you are tempted to dip into your savings to go on a shopping spree, a CD can instill savings discipline. Because the return on CDs is known and stable, they are a good investment vehicle for saving for short-term goals, such as a car purchase, home deposit, and so on. A stock with an automatic dividend reinvestment plan can also help you save, although a decline in the stock price could erode your dividend gains. And unlike a CD, you can sell your stock whenever you fancy without penalty so they are not the best option to instill savings discipline.

CDs versus Bonds, Annuities and Money Market Funds

CDs, bonds and annuities are all fixed income investments. They pay a fixed interest rate on a regular schedule on a principal amount. At maturity, the full principal sum is repaid to the investor. But when considering taxes, time horizon and interest rates, they differ in many ways.

Here’s how CDs and Bonds differ

• Both CDs and government bonds are safe haven investments. They are in essence low risk, low interest rate loans that pay an interest rate on a principal sum. When you purchase a CD, you become a lender to the issuing bank, and with a bond to the government. Whereas CDs are short-term investments, bonds can be short, medium or long term; 20- and 30-year treasury bonds are commonly placed in retirement portfolios. Corporate bonds can be low to high risk. A high yield bond, also known as a junk bond, pays high interest rates to compensate the investor for a high risk of payment default.
• The value of CDs and bonds move in the opposite direction when interest rates rise or fall. An increase in interest rates increases the average rate paid on CDs. The interest rate on your bond is now lower than that of new bond issuance. If you sold your bond on the secondary market, it could sell for less than the face value. Nonetheless, at maturity, the bond will be redeemed at face value.

Here’s how CDs and Annuities differ

• Annuities are a life insurance product used to provide guaranteed income in retirement. They pay out the principal balance in a stream of regular, fixed payments or a lump sum at a future date. The interest payments on both CDs and annuities are treated as taxable income, although the principal on a CD is never taxed. For annuities, taxes are deferred on the principal until the annuity maturity date.
• An annuity has a long-term investment horizon of typically 5–30 years, whereas a CD term is up to 5 years. Annuities generally pay a higher interest rate. The best 5-year CD rates are paying around 2.20–2.35 interest (Bankrate.com) versus 2.50–3.60 on annuities (allthingsannuity.com).

If you want to diversify your risk across all these fixed income securities, a money market fund may do. A money market fund is a type of mutual fund that invests in short-term fixed income securities, as well as cash. By investing in a money market fund with CDs, treasury bonds, commercial paper (a short-term debt issued by companies to pay expenses such as payroll) and other debt securities, you can diversify your risk. Better still, this low risk fund will pay you a regular dividend (usually quarterly) so you also have a steady income stream.

Who Are CDs Suitable for?

Any investor would be wise to include CDs in a diversified investment portfolio. They are placed under Cash and Cash Equivalents, which along with Stocks and Bonds make up the three major allocations of a portfolio. Cash and cash equivalents are the most liquid assets in an investment portfolio, meaning they can be converted into cash in a year or less time. They include certificates of deposit, treasury bills, money market funds and short-term government bonds. Because the returns on cash equivalents and bonds have a negative correlation to those of stocks, adding CDs to your portfolio is a way to diversify market risk. When stock prices are falling, investors run to the safety of these lower risk investments.

But how much money should you invest in CDs? An investor with a low risk appetite such as a person saving for retirement will have a higher percentage of their money in cash and cash equivalents whereas a millennial with a steady income will place more money in stocks and bonds, and may even dabble in high yield bonds. Reviewing the following investor profiles will help you to determine how much money to place in CDs.

The Investment Portfolio

Given the low risk and guaranteed return of a CD, this stable investment instrument has a place in almost any investment portfolio. Below are sample portfolios for five investors with different risk profiles and their typical CD allocations.

👨‍💼The Conservative Investor (The Retirement Saver) – CDs have the ideal risk-return profile for a retirement portfolio. Retirement portfolios are comprised of mostly conservative investments. As much as 30 percent of a retirement portfolio is in cash and cash equivalents.

👩‍💻The Balanced Investor – The balanced investor has an allocation of fixed income securities, and value and growth stocks. This investor uses a high bond allocation to diversify risk exposure to the stock market. CDs and other short-term investments make up about 10 percent of the portfolio.

🤵The Growth Investor (The Millennial) — The growth investor has a 70 percent stock allocation, with as much as half invested in high growth and foreign stocks. Only 30 percent of the portfolio is diversified into bond and short-term investments. An alternative asset class (e.g., real estate, hedge funds, cryptocurrencies) may also be included in the Balanced and Growth portfolio.

👨‍🚒The Emergency Saver— CD ladders are often used to ensure access to emergency funds. To create a CD ladder, invest in multiple CDs with staggered maturities (as short as one month). If you do not need the funds in the CD when it matures, you can roll over the CD into a new one. Rolling over a short-term CD on a regular basis allows you to earn higher interest rates than a savings account while having access to your money in the case of an emergency.

👩‍🎓The Goal Saver – A CD is a good way to save for a future investment goal. The saver can earn above the savings account rate while saving for college, a house, a wedding, and other important life events.

4 Steps to Buying a CD Online

Now that you have determined the type of CD you want to buy, you are ready to shop for the best CD rates.  By making use of LearnBonds free CD comparison tools, you can ensure you get the most attractive rates and terms in the market. Here’s how:

1. Shop around for the best rates – You can quickly compare the CD interest rates using our comparison tool above. Check the compounding frequency. Daily compounding will have a higher APY than monthly compounding.

2. Choose the CD term length – The term will be determined by your investment goal. If the CD is part of a retirement fund, the term may be 5–10 years while a CD allocated to an emergency fund may be rolled over every six months.

3. Choose the payout frequency – Some issuers will give you an option on how frequently to receive your interest rate payments – monthly or annually, for example.

4. Use our CD Calculator – The CD Calculator will help you assess how different interest rates, compounding frequency and maturities, as well as taxes and inflation, will affect your total return.

Remember to choose a deposit insured issuer. CDs can be bought from brokerages, banks and credit unions. Ensure the issuer is insured with deposit insurance.