High-Yield CDs

What Are High-Yield CDs?

High-yield certificates of deposit (CDs) are bank products that consumers can purchase to grow their savings. A high-yield CD holds a fixed amount of money for a period of time, during which the money in the CD earns interest at a fixed rate.

High-yield CDs earn interest at a higher rate than traditional CDs. Like high-yield savings accounts, high-yield CDs are typically offered by online banks. These institutions save money by not having physical locations, so they can offer better interest rates on CDs and savings accounts than traditional banks might.

A high-yield CD can make sense for someone that has some excess cash and would like to earn some incremental yield on it in a very low-risk way. It doesn’t make sense for someone with uncertain liquidity needs.

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Professional

Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

How High-Yield CDs Work

High-yield CDs work the same as a traditional CD. The CD will have a term, which is how long your money must be held in the account before you can withdraw it without penalty. There will also be an interest rate associated with the CD. This rate, expressed as the annual percentage yield (APY), tells you how much money your CD will earn during each year of its term.

Like other CDs, the interest rate on a high-yield CD is compounding. For example, if your CD compounds monthly, then at the end of each month the interest the CD has earned will be added to the balance of the account. The interest earned for the next month will be calculated using the total balance of the account including the interest. In short, compounding interest means that your interest can earn you even more money as your CD term continues.

Most CDs have a minimum required deposit to open the account, usually around a few thousand dollars. You may be able to open the account without the required deposit, but you’ll have to fund the account within a few days for it to remain open.

“The minimum deposits for many high-yield CDs are $5,000 or less and some don’t even have a minimum,” said John Halkins, senior investment advisor at Retirement Expert.

High-yield CDs can have a term anywhere from a few months to several years. When the term ends, your CD matures. Many banks set CDs up to renew automatically upon maturity, so your money will be locked up in another CD with the same term as soon as the current term ends. The interest rate for the new term may be different if the bank’s rates have changed since you started the first CD.

If you opt out of the automatic renewal, the bank will return your initial deposit along with any interest your CD earned during its term.

High-Yield CDs vs. Traditional CDs

The biggest difference between high-yield CDs and traditional CDs is the interest rate. According to Halkins, the APY required to be considered a “high yield” CD changes over time, as the Federal Reserve adjusts rates and both banks and credit unions follow suit. As of January 2023, Halkins said that “anything above 3% would be classified as a high-yield CD.”

Besides the difference in interest rates, high-yield CDs might differ from a typical CD in other ways. Certified Financial Education Instructor James Allen told Annuity.org, “In addition to the higher interest rate, high-yield CDs may also offer other perks, such as flexible terms and no fees.”

The required minimum deposit for a high-yield CD might be higher than that of a regular CD, said Andrew Lokenauth, founder of Fluent in Finance. Additionally, Lokenauth said that high-yield CDs may have longer maturity terms and might charge greater penalties for withdrawing funds from the CD before maturity.

Pros and Cons of High-Yield CDs

High-yield CDs can be an excellent tool to help offset the effects of inflation on your cash savings. But these bank products come with some drawbacks.

To decide whether a high-yield CD would benefit your personal financial situation, consider the pros and cons. Many of the benefits and drawbacks of high-yield CDs are the same as those of traditional CDs.

Is a High-Yield CD Right for You?

High-yield CDs are very safe and offer a greater return on your investment than simply holding the cash in a savings account. A high-yield CD could be beneficial for those who want to protect their savings from being eroded by inflation but don’t want the risk of exposing their cash savings to the fluctuations of the equity market.

According to Allen, “Consumers who are looking for a safe place to invest their money and who don’t mind tying up their funds for a set period of time may find that a high-yield CD is a good fit for them.” He especially recommends the product for savers who are nearing retirement.

Additionally, the varying term lengths of high-yield CDs make them potentially beneficial for consumers who are saving for a short-term goal. “High-yield CDs may be most suitable for individuals who have short-term savings goals, such as saving for a down payment on a house, or for those who are looking for a safe and secure way to invest their money,” said Lokenauth.

If you do decide to purchase a high-yield CD, Lokenauth advises shopping around and comparing CD offers from different banks or credit unions, “as different institutions may have different interest rates, terms and conditions, penalties or fees for early withdrawal.”