Certificates of deposit (CDs) are a good option if you want a low-risk investment that will earn income on cash you don’t need immediately. CD rates, especially on the high end, have ticked up slightly over the past week as banks continue to live in the high-interest rate world brought on by the Federal Reserve’s effort over the past year to stymie inflation.
Three-month CD rates
Rates on three-month CDs have increased slightly from a week ago. The national average rate was 0.83% as of May 25, 2023, the latest data available, up one basis point from the previous week and up 17 basis points from a month prior.
The current national high for a three-month CD is 5.15%, which would earn more than $315 in interest with a $25,000 deposit.
Six-month CD rates
The top six-month CDs can offer the best of both worlds: strong interest rates and a short-term commitment.
The national average APY for six-month CDs is 1.24%, up from 1.21% last week and 1.11% one month ago.
The current top national rate for a 6-month CD is 5.41%, according to the data available from Curinos. But you may be able to find better deals by shopping around.
You’d earn almost $670 in interest if you put $25,000 in a six-month CD with a rate of 5.41%.
One-year CD rates
If you’re up for setting aside your savings for a full year, you’ll be able to find even more impressive rates. One-year CDs can give you returns as high as, or even higher than, longer-term options.
Rates on 12-month CDs are increasing. The national average APY is 1.51%, up two basis points from last week and eight basis points from a month before.
The current national high for a 12-month CD is 5.37% which would earn more than $1,340 in interest with a $25,000 deposit.
Two-year CD rates
Yields on longer-term CDs, such as two-year terms, are also on the rise.
The national average APY is 1.48%, an increase of one basis point from last week and six basis points from one month ago.
The current national high for a 24-month CD is 5.22% APY. Locking in a rate close to this high will maximize your returns on this longer-term investment.
If you invest $25,000 in a 24-month CD at the high rate of 5.22% you’d earn about $2,680 in interest.
Three-year CD rates
The national average APY for a three-year CD stands at 1.43%, which is up one basis points from last week and up five basis points from a month ago.
The highest rate was 5.63%, which would net almost $4,465 in interest if you invested $25,000.
Methodology
To establish average certificate of deposits (CDs) rates, Curinos focuses on CDs intended for personal use. CDs that fall into specific categories are excluded, including promotional offers, relationship-based rates, private, youth, senior, student/minor, affinity, bump-up, no-penalty, callable, variable, step-up, auto transfer, club, gifts, grandfathered, internet-only and IRA CDs. The average CD rates quoted above are based on a $25,000 deposit.
Frequently asked questions (FAQs)
A CD ladder helps you take advantage of higher rates offered by longer terms without tying up your money indefinitely.
For instance, let’s say you have $12,000 to invest and decide to create a ladder of three CDs. You invest $4,000 each into one, two and three-year CDs. When the one-year CD matures, you convert your principal and earned interest to the higher-rate 36-month CD, and do the same with the 24-month CD the next year. This way, you’ll eventually end up with three 36-month CDs with high APYs, with one maturing each year.
Here’s how you can build your own CD ladder:
- Split the amount you want to invest by the number of CD terms you’d like.
- Research the best CDs to find top providers and the best rates for various lengths.
- Set up the CD accounts you’ve chosen.
- As the CDs mature, reinvest the cash into longer-term CDs.
The second step is crucial. Just because the Fed has raised interest rates doesn’t mean you’ll get the same or even similar rates from different financial institutions for the same CD term.
Generally, the earnings you make from your CDs are considered taxable income by the IRS. If you earn $10 or more, the financial institution should send you (and the IRS) a yearly 1099-INT form reporting your interest earnings. Even if you don’t receive a form, you’re still required to report the income.
For earnings of at least $1,500, you’ll need to itemize your interest income sources on Schedule B of the 1040 form. The silver lining is that there are some exceptions, but they mainly apply to government-issued investment vehicles.
The tax amount you pay depends on your specific marginal tax bracket.
Interest income from treasury bills, notes, and bonds, like I bonds, is exempt from state and local income taxes.
