Published in: Banks | Dec. 31, 2018

CD vs. Savings Account

Find out which of these bank accounts could work best for you.
A jar full of coins labeled Save.

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For the first time in years, savers are finally starting to see interest rates rise. That's great news for those who rely on income from savings accounts, certificates of deposit (CDs), and other income-producing bank accounts. But it also raises a question: does it make more sense to open a CD or to keep your money in a regular savings account?

CDs and savings accounts share some of the same characteristics, but they're also different in important ways. Depending on your particular financial goals, you might find that either a CD or a savings account works better for you, or a combination of both products could be the best way to meet all of your needs. Below, we'll look more closely at how these products work so that you can make an informed decision.

What you should know about CDs

Certificates of deposit are bank accounts in which a depositor puts money into the bank for a specified period of time in exchange for interest. Most banks offer CD terms that range from extremely short-term, one-month CDs to long periods of 10 years or more.

For most CDs, the interest rate is fixed at the beginning of the period and stays the same until the CD reaches maturity. Even if prevailing interest rates in the market change, the rate on your CD typically stays the same. A small number of financial institutions offer different forms of variable rate CDs, such as so-called “step-up CDs,” that give savers a chance to raise the interest rate on the product if prevailing rates in the banking market climb. Some banks also pay higher rates if you agree to put in a large amount of money, with the level for so-called “jumbo CDs” typically being $100,000.

The most important aspect of a CD is that it requires you to commit to leaving the money in the account for the entire term of the CD. Early withdrawal penalties can apply if you try to take money out of a CD before it reaches maturity. Based on the institution, penalties are often between three months' and one year's worth of interest on the CD, with the trend having moved over time toward more onerous penalty provisions at most institutions.

In exchange for locking up your money, banks typically give you better interest rates on CDs than you'll find with a savings account. In general, the longer the term of the CD, the higher the rate, although that relationship can change depending on conditions in the broader banking and credit markets.

Bank CDs are eligible for insurance protection under the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per institution. Similar insurance from the National Credit Union Administration (NCUA) applies to CDs issued by most credit unions. This insurance protects your account in the event that your bank becomes unable to meet its financial obligations, with the FDIC or NCUA stepping in to make you whole.

How savings accounts work

Savings accounts are another option that savers can use to keep their money safe and earn interest. These bank accounts let customers deposit money with their chosen bank and get paid interest at the then-prevailing rate. Unlike CDs, there's no requirement that savers leave their money in a savings account for any minimum amount of time. You generally have unlimited access to your money anytime you want.

Interest rates on savings accounts are set periodically and change over time. Whenever the rate on a savings account changes, the bank will immediately start paying you interest at the new rate from that point forward until the next rate change takes effect. Some savings accounts have tiered rates depending on your account balance, with relatively low interest rates paid on smaller-sized savings accounts but higher rates going to those who keep large amounts of money on deposit with the bank.

The ability to get at your money at any time without penalty is the key advantage of savings accounts. However, at most banks, the rates you'll get on a savings account will be somewhat less than what they offer on CDs. That's because with a CD, the bank knows it'll have the money on deposit for a set period, and so it can invest that money more freely. Since you retain the right to take back your savings account money whenever you want, the bank has to account for that possibility when it uses your savings for its banking operations.

You'll find different types of savings accounts at some banks. For instance, if you have relatively little money saved up, then a regular savings account can give you the best mix of competitive interest rates and minimal fees, as they typically require low minimum balances in the account. By contrast, high-interest savings accounts pay more attractive rates to customers, but they often require you in exchange to keep a larger amount of money in the account as a minimum balance. Go below that minimum, and you can end up having to pay monthly maintenance fees or other charges that can offset whatever higher interest rate you've earned.

Savings accounts are also eligible for FDIC and NCUA insurance protection. Again, if something happens to your bank or credit union, the insurance will kick in up to a $250,000 limit to protect your assets.

Online vs. brick-and-mortar CDs and savings accounts

Regardless of whether you prefer a CD or a savings account, you still have to make an additional choice: should you pick an online banking institution or a brick-and-mortar bank location near you? Online banks often offer better interest rates than you'll find at traditional banks, largely because online banks don't have the same expenses related to maintenance and upkeep of their branch locations. With options like direct deposit and electronic funds transfer, many customers find it convenient to use online banks.

On the other hand, if you prefer to build a relationship with your banker, brick-and-mortar banks will generally appeal to you more. Online banks typically have customer support via phone or chat, but you won't have the comfort of visiting an actual branch and speaking directly to someone in person. If that's important to you, then it can be worth taking a lower amount of interest in exchange for the customer service you need.

Pick the right account for you

Whether a CD or a savings account will work better for you depends on your individual circumstances. However, some general rules are useful:

  • If you need access to your money at all times, then a savings account is a better bet than a CD. The penalties that CDs charge are simply too high to make them work well if you need to make early withdrawals.
  • If you know you won't need a particular amount of money until a fixed time in the future, a CD whose term matches up with what you need the money for can work very well. Many savers use multiple CDs with different maturities in order to ensure that they have access to a certain amount of their savings each year for several years in the future. Doing so can help maximize interest income while still having sufficient access to money as needed.
  • When interest rates are rising, you should generally be slower to lock in a long-term CD rate. That's because if you keep your money in a savings account, CD rates could rise dramatically in a short period of time, leaving you with a greater amount of total interest. Conversely, when rates look ready to fall, locking in a long-term rate in a CD before it goes down can be your best option.

Finally, the specific rates that your chosen financial institutions offer play a vital role in deciding which option is best for you. For instance, even if most banks offer their best rates on CDs of five years or more, some banks occasionally run specials that can deliver attractive rates on short-term CDs.

Keeping your hard-earned money safe is important, and both savings accounts and CDs can help you protect your money while still earning interest income. Look at the resources available to get information about specific CD and savings account offerings, and then with these ideas in mind, you'll be able to choose the account or accounts that are right for you.

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