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Two Things to Consider When Choosing a CD Term

Putting money into a certificate of deposit (CD) takes a little more thought than simply depositing it into a savings account. That's because you have to choose your time commitment with a CD—and it's a commitment with teeth. If you cash out of the CD before it reaches its maturity date, you'll be hit with an early withdrawal penalty. So it's best to only do that due to a financial emergency.

So how to decide on the right CD for you? While you'll always want to shop around for a top-paying CD, it's more important that you start with a decision on how long you want to commit your funds. And deciding that involves two important considerations.

1. When You'll Need the Money

First, think through your financial timeline. Are you saving the cash in a CD for a specific purpose, like buying a home or paying tuition? Or is it simply surplus savings you know you don't need for a while because you can draw on other savings first, if needed? If you think you may want to access the funds within the year, there's no point in seeing how high a rate you can earn with a 3-year CD. On the flip side, if you're very confident you can manage without this cash for a while, you'll want to see how rates compare for long-term CDs that guarantee your rate much further down the road.

2. Where Rates Are Headed

The second thing to consider is where broader U.S. interest rates are headed. The Federal Reserve controls the federal funds rate, and that in turn impacts what banks and credit unions are willing to pay customers for their deposits. When the federal funds rate moves up, so too do savings account and CD rates—and vice versa.

Since CDs represent a rate guarantee into the future, it's smart to think about whether today's rate is one you'll be happy with next year or beyond, depending on the CD term you choose. If rates are expected to fall in the near term, locking in now means you can extend one of today's higher rates for much longer. But if rates are expected to rise, then locking in now could hurt you. We're currently in a period of very high rates with a strong expectation that the Federal Reserve will lower its benchmark interest rate this year, next year, or both. That means bank and credit union deposit rates are very likely to fall in the coming year or more—making the case for jumping on one of today's best CD rates for as long a term as you feel comfortable.

Want the Very Highest Rate? Stick to Short Terms

If the best CD duration for you simply means the term paying the very highest annual percentage yield (APY), then your best choice right now is six months. The top overall rate among all nationwide CDs is 5.75% APY, and you can earn that with a 6-month certificate from . The runner-up nationwide rate of 5.55% is also in the 6-month term, offered by .

But if six months is too long, or you can stretch a little further, then you can score rates above 5.40% APY in both the 3-month and 1-year CD terms.

To Win Against Fed Rate Cuts, Lock in for Longer

As we mentioned, odds are high that the Federal Reserve will begin lowering its benchmark interest rate sometime this year, and those cuts could very well continue into 2025. For now, the central bank is in wait-and-see mode, with another rate hold expected next week as it watches for signs that inflation is falling sustainably lower.

If 2024 and 2025 Fed rate cuts do come to pass, what you'll be able to earn on savings in a year or two will be much lower. This is why it could be smart to stretch to a multi-year CD. By locking in a rate such as the top 3-year yield of 5.00% APY, you'll be guaranteed to earn that stellar return until 2027. Can't quite commit your funds for that long? You can go for a shorter rate lock of two years, but earn a higher 5.20% APY until 2026.

Even 4-year and 5-year CDs can be a smart move. While their top rates in the 4% range are lower than the returns you can earn on shorter certificates, if the Federal Reserve drops its benchmark rate two or three percentage points over the next few years, a rate promise above 4% that lasts until 2028 or 2029 will be a financial gift to your future self.

How We Find the Best Savings and CD Rates

Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000.

Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.