Should I deposit $5,000 into a CD or savings account? (2024)

FAQs

Should I deposit $5,000 into a CD or savings account? ›

You should put your $5,000 into a CD when your ultimate goal is to earn as much interest as possible. While competitive, high-yield savings accounts generally don't offer as high an interest rate as CDs do. You can likely secure the very highest rate by opening a short-term CD with an online bank.

A certificate of deposit offers a fixed interest rate that's usually higher than what a regular savings account offers. The tradeoff is you agree to keep your money in the CD for a set amount of time, typically three months to five years.

Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family.

Penalties: One of the main drawbacks of CDs is that in most cases you're locked into the maturity term. If you take money from the CD before it matures, you will get hit with a penalty fee equal to at least seven days of the interest earned or even more.

CDs are good for medium-term savings goals. The best CD rates tend to be at online-focused institutions. High-yield CDs in recent years have reached 4% to 5% annual percentage yields, which might be enough to keep better pace with inflation than regular savings accounts can.

CD rates tend to lag behind rising inflation and drop more quickly than inflation on the way down. Because of that likelihood, investing in CDs carries the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation.

A Certificate of Deposit (CD) could lose money if funds are withdrawn early, incurring penalties that may exceed earned interest. CDs are generally low-risk and guarantee a fixed interest rate for the term. Early withdrawal penalties can sometimes reduce the principal, not just the interest.

About 29% of respondents have between $501 and $5,000 in their savings accounts, while the remaining 21% of Americans have $5,001 or more. Few hold much cash in their checking accounts as well. Of those surveyed, 60% report having $500 or less in their checking accounts, while only about 12% have $2,001 or more.

To turn $5,000 into more money, explore various investment avenues like the stock market, real estate or a high-yield savings account for lower-risk growth. Investing in a small business or startup could also provide significant returns if the business is successful.

Are CDs safe if the market crashes? ›

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.

If interest rates fall before the CD expires, the bank is out of luck and must give you the rate it quoted. If rates climb, you're stuck with the lower rate you agreed to when you opened the account. And if you take your money out before a CD matures, you'll pay a penalty -- typically three months of interest.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.

The takeaway

A CD can be the right move if you have a low-risk tolerance and a shorter investment horizon. To avoid the early withdrawal penalty, forecast your expenses and make sure you can commit to not accessing the funds for the entire term length.

Unlike traditional or high-yield savings accounts, which have variable APYs, most CDs lock your money into a fixed interest rate the day you open the account. That's why if you suspect that interest rates will soon drop, it can be a good idea to put money in a CD to preserve the high APY you would earn.

You can typically access your funds in a savings account more easily than a CD account; however, some banks may charge a fee if too many withdrawals are taken from the account.

If you have $10,000 you're comfortable with locking away for a year, a one-year certificate of deposit (CD) that earns a competitive yield may be a smart choice. These days, rates on some one-year CDs are higher than what many savings accounts and money market accounts earn.