Here’s What Advice Financial Pros Have Regarding CDs

Certificates of deposits, long ignored by many savers prior to the Federal Reserve’s recent campaign of interest rate hikes to curb inflation, have regained attention—however, financial advisors suggest savers fully weigh their priorities and needs before committing cash to CDs.

The national average annual yields on one-to-five-year CDs currently range from 1.30% to 1.59%, with three- and six-month CDs averaging 0.62% and 1.19%, respectively. However, savers can find far higher rates: The top nationwide rates for three-month to five-year CDs range from 4.77% to 5.65%.

That’s a far cry from CD rates that hovered near 0.20% for much of the decade prior to the Fed’s rate hikes. Despite their new-found attraction, though, CDs warrant thoughtful consideration depending on risk appetites and cash needs.

Not All in One Basket

Wes Battle, a financial advisor with Raymond James in Odenton, Md., works primarily with federal workers. Battle said they tend to carry larger cash reserves than most.

That preference would mean they should avoid putting too much into CDs, which charge early withdrawal penalties.

“We are suggesting NOT to put all cash into CDs,” Battle said.

Aside from having to pay early penalties should a cash emergency arise, Battle said savers also face interest-rate risk with CDs. If the Fed keeps raising rates, they might miss out on more attractive CD yield opportunities ahead.

The Early Withdrawal ‘Myth?’

Kassi Fetters, an advisor with Artica Financial Services in Anchorage, said savers should note that early withdrawal penalties can vary depending on the institution issuing a CD.

“It’s a myth that when you place your money in a CD that it is ‘locked’ in,” Fetter said. “This myth has prohibited many families from taking advantage of CDs and the current great rates.”

Fetters said local credit unions usually have better terms if savers need to remove money from a CD. Moreover, most will guarantee the return of the entire principal amount even even on the withdrawal of a full balance on a just-opened CD.

Rate Risk and Cash Needs

Joey Loss, an advisor with Flow Financial in Jacksonville, Fla., said high-yield savings accounts paying rates near 5% annually can offer an attractive option to CDs for savers who may need cash relatively quickly.

“I am encouraging clients to enjoy the current high-interest offerings on bank savings account for short-term savings,” Loss said.

Those accounts, however, will yield less if interest rates fall. That won’t happen with a fixed-rate CD.

“If clients are worried about rates going down and they want to lock in these higher rates for longer, we’re going with longer-term Treasury bills or CDs,” said Crystal Cox, an advisor with Wealthspire in Madison, Wisc. “If a client values getting the highest return, then I find the instrument that is currently paying the highest, and as long as it makes sense from a time-horizon standpoint, that’s what I’ll go with.”