Should You Lock in Today’s CD Rates? (2024)

Interest rates on savings products are hovering around highs not seen in years—but high rates won’t last forever.

With the Federal Reserve closely watching inflation, there’s a chance rates could drop as soon as this fall or sometime in early 2025. While that would likely mean a quick drop in rates on savings accounts, it wouldn’t impact all savers evenly. In fact, with a long-term CD, you could lock in today’s generous rates for years to come.

For some savers, moving money to one of these higher-for-longer CDs is a no-brainer. But, if you’re not exactly sure when you’ll need the money—or you’re worried about surprise expenses—there’s more to consider.

CDs lock up your money for months or years at a time. While you could technically withdraw your funds early, you’d face a penalty for doing so—and you’d also forfeit some or all of your return. So what move is right for you? Here’s how to decide.

Understand interest rate trends

Today’s top CDs pay interest rates of 4% to over 5%. Overall, CD rates are some of the highest they’ve been in over a decade, according to data collected by the St. Louis Federal Reserve. Rates on other savings instruments, including high–yield savings accounts and money market accounts, have also risen sharply since the Federal Reserve started hiking interest rates in March 2022 to fight runaway inflation.

So, why CDs, right now? Lately inflation has eased, falling to around 3% from nearly 9% at its peak. Instead of raising rates further, the Fed has responded by holding them steady at its last several rate-setting meetings.

Wall Street, which closely watches every Fed move, expects the central bank could change course as soon as September 2024. While Fed officials have been more cautious, it’s clear they have also been discussing rate cuts.

For savers, this means time is of the essence. While there are no guarantees when it comes to interest rates, should the Fed begin slashing rates this year, savers who had the foresight to lock away cash in CDs could end up big winners. While interest rates on savings accounts, money-market accounts and new CDs would fall quickly, existing CDs, with their fixed interest rates and guaranteed returns, would continue to pay out at higher levels until maturity.

Of course, no one—not even Wall Street or the Fed—really knows where the economy is headed. And your personal financial situation should ultimately determine where you put your cash.

When you should lock in current CD rates

CDs have two advantages over savings accounts and other options like money market funds. First, they offer interest rates that are significantly higher—often by up to a percentage point. Second, they let you lock prevailing interest rates, so if rates fall you’ll continue to earn the rate you signed up for, for the entire term of the CD. Of course, they have a downside too. Once you buy a CD, you can’t touch your savings until it matures.

The upshot, say financial planners, is that CDs work best if you are planning to set aside cash for a big expense, like a wedding or the down payment on a house, where you can be relatively certain about the timing.

“If you know you’re going to have to replace your car, or you know you’re going to have to cover college expenses, there’s no need to let [your cash] sit” in a low-interest account, says Zaneilia Harris, president of Harris & Harris Wealth Management Group in the Washington, D.C., metro area. “The goal is to try to earn as much interest as possible on all of your cash.”

CDs can also help with budgeting, say planners. If you’re not as disciplined with money as you want to be, cashing in a CD can be less tempting because it’s relatively difficult to do. The hassle creates a potentially useful barrier, says Scott Cole, founder of Cole Financial Planning and Wealth Management in Birmingham, Ala. “It’s like a mental circuit breaker.”

When it’s too risky to lock in today’s rates

Because CDs require you to lock away your money for months or years, they are less useful for cash you’ve set aside to cover surprises or other pressing short-term needs—say repairing a broken hot water heater or a car transmission. “Determine when you think you’re going to need the money. If you’re going to need it in the next two to three months, just keep it in cash,” Cole says.

If you buy a CD and do end up needing the cash, you are likely to have to pay a penalty. Penalties typically range from two to 12 months’ worth of interest earned, with higher penalties assessed on longer-term maturities. While most penalties just reduce the amount of interest you would otherwise accrue, it’s theoretically possible to lose principal, as well.

While CDs aren’t ideal for money you will need in the short term, they also aren’t the best option for the very long-term. That’s because the further you look into the future—beyond the next two to three years—the murkier forecasts for the economy and interest rates tend to get. And for very long-term savings goals, investing in the stock market becomes a more viable strategy. “I don’t think I would go with a five-year CD,” Edward Mendlowitz, emeritus partner at accounting firm Withum, says.

When—and how—to seek a middle course

Sometimes, it isn’t as clear what the best choice is: If you’re still commitment-shy, or if you know you’ll be moving but aren’t entirely sure when. In that case, there are a few ways you can keep one foot in and one foot out.

The trade-off is that indecision comes with a cost, one way or another. Here are a few options you can explore if you’re on the fence.

Build a CD ladder

One way to hedge your bets is to divide your money and buy CDs with different maturities, a strategy called laddering. Building a CD ladder entails opening a series of CDs with maturity dates staggered at regular intervals—say, monthly or quarterly. Just keep enough liquid cash to tide you over between renewal dates.

A CD ladder can be a smart way to keep some of your emergency-fund money, since you generally won’t need access to the entire balance at one time. “If you have enough money to ladder, I like the idea of putting half in a one-year CD and half in a three-year CD,” to balance risk and reward, Mendlowitz says. If you don’t need the cash when a CD comes up for renewal, just roll it over into a new one with a maturity date that hews to your existing schedule. And if you do need to dip into your emergency fund, a portion of it is never too far away.

Be willing to eat the penalty

If you are thinking of buying a CD, and don’t think you’ll need the money early—but you just can’t quite commit—don’t be afraid to risk eating the penalty. It isn’t the optimum outcome, but it’s usually not the end of the world either. “What you’re doing if you break the CD is effectively just lowering your yield,” Cole says.

Most early withdrawal penalties are designed to claw back interest you otherwise would have earned if you held the CD to term. The penalty on a CD of a year or less might be three months of interest, for example, while a five-year CD penalty might be a full 12 months’ worth. In general, you can expect your principal back, unless you cancel the CD shortly after opening it, before you have accrued enough interest to cover what you owe.

Look for a no-penalty CD

Of course, you can avoid the risk of a penalty fee by choosing a no-penalty CD instead. Not all banks offer these, but a number do, especially among online banks.

The trade-off with no-penalty CDs is that you won’t earn the highest rates you could earn with conventional CDs. Some no-penalty CDs have APYs very close to those banks’ top rates on ordinary CDs, while the spread at other banks is close to a full percentage point.

For instance, CIT Bank’s 11-month no-penalty CD has an APY of 3.5%—the same rate as its 13-month traditional CD. At Synchrony Bank, though, the no-penalty CD’s 0.25% APY is far below the 5.15% on its standard product.

No-penalty CDs tend to have fewer options when it comes to the term length. Some banks may only offer a no-penalty CD with a single duration. Likewise, minimum requirements also vary.

—Additional reportingbyAly J. Yale

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More About Savings and CDs

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• How to Open a Savings Account
• How to Choose a High-Yield Savings Account