All the stock market and economic uncertainty this year means that you may want to hold more cash than usual. Fortunately, there are a few safe-haven options at many banks and credit unions that are paying returns in the 4% range now—certificates of deposit (CDs) and high-yield savings accounts (HYSA).
But which is better for you depends on whether you need immediate access to your money or plan not to touch it for a while…and how important a guaranteed rate of return is to you. Ken Tumin, founder of DepositAccounts.com, explains the pros and cons of each…
Whether you choose a CD or HYSA, there are a few things to be aware of…
Smaller online banks and credit unions offer the highest yields. But these accounts require you to do all your banking through the Internet and ATMs.
Be sure your money is protected by the Federal Deposit Insurance Corporation (FDIC), an independent US government agency that covers depositors for losses up to $250,000 per bank per depositor in the event of their bank’s failure. If your account is at a credit union, the National Credit Union Administration (NCUA) offers the same protection.
Don’t forget about taxes. The interest you earn on these accounts is taxed annually as ordinary income just like wages.
CERTIFICATES OF DEPOSIT: THE BASICS
A CD is a bank or credit union product with a fixed interest rate that promises a guaranteed return for a set period of time usually ranging from three to 60 months (five years). In return, you agree to leave that money untouched until the CD matures. Once you take out a CD, you typically can’t add more money to it and get the same rate.
Best for: Savers who have money earmarked for an upcoming expense at a specific point in the future such as a new car or a wedding.
Advantages: CDs typically pay the highest rates of all deposit accounts. If interest rates fall, you still enjoy a predictable return with a rate that cannot be changed
What to watch out for…
Long lock-up periods. In general, the longer the term of your CD, the higher the interest rate you earn. But we’re currently in an unusual period in which long-term rates are similar to short-term ones. That means if you hold a five-year CD and interest rates climb, you miss out until the CD matures and you can take out your money.
Early withdrawal penalties. If you “break” a CD because you need the money, you typically are charged a fee ranging from 90 days’ to one year’s worth of interest.
Best CD deals available now nationwide for banks and credit unions…
Abound Credit Union 10-Month Certificate pays a 4.45% annual percentage yield (APY).* Minimum deposit: $500. Ninety (90) days’ interest penalty for early withdrawal. 800-285-5669. AboundCU.com
Eagle Bank 12-Month CD, 4.55% APY. Minimum deposit: $1,000…maximum $500,000. Ninety (90) days’ interest penalty for early withdrawal. Note: You can also get a 4.4% APY for an 18-month Eagle Bank CD and a 4.45% APY for a 24-month CD. 301.986.1800. EagleBankCorp.com
Lafayette Federal Credit Union 5-Year Fixed Certificate, 4.28% APY. Minimum deposit: $500. Six-hundred (600) days of dividends penalty for early withdrawal. 301-929-7990. LFCU.org
HIGH-YIELD SAVINGS (HYSA) ACCOUNTS: THE BASICS
HYSAs function like traditional savings accounts with a variable interest rate. That’s beneficial if rates rise because you immediately earn the higher yield, but it hurts your returns if rates fall.
Best for: Savers who need money in case of emergencies or unexpected expenses.
Advantages: Typically, you can add or withdraw money whenever you want.
What to watch out for…
Changes in the interest rate can occur at any time. Banks and credit unions can drop rates at their discretion for any reason.
Sneaky fees and confusing limits. Some HYSAs come with maintenance charges, minimum balance requirements and tiered levels that pay lower rates if you deposit less money.
Best HYSA deals now with no maintenance fees or tiered rates…
Pibank Savings Account pays a 4.6% APY on all balances. No minimum balance. 877-678-0888. PiBank.com
My Banking Direct High-Yield Savings, 4.4% APY on all balances. Minimum deposit: $500; $1 minimum balance. 866-285-1856. MyBankingDirect.com
If you want access to your money at physical locations…
Capital One 360 Performance Savings, 3.6% APY on all balances and no minimum deposit. The bank has about 750 branches across six states and Washington, DC. 877-383-4802. CapitalOne.com
*Annual percentage yields and other details were correct as of May 13, 2020.
