Certificates of deposit (CDs) make sense if you’re in need of a low-risk investment that will earn income on cash you don’t need immediately. CD rates held mostly steady over the past week, according to data from Bankrate, as the Federal Reserve works to curb inflation by raising short-term rates.
Three-month CD rates
Rates on three-month CDs have decreased since last week by one basis point to 1.41% APY as of April 25, 2023. The average APY is down three basis points from a month prior.
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 1.91%, up slightly from 1.88% last week and 1.90% one month ago.
The current top national rate for a 6-month CD is 4.88%, according to the data available from Bankrate’s database. But you may be able to find better deals by shopping around.
You’d earn around $$620 in interest if you put $25,000 in a six-month CD with a rate of 4.88%.
One-year CD rates
If you’re up for setting aside your savings for a full year, you’ll be able to grab even more impressive rates. One-year CDs can give you returns as high as, or even higher than, longer-term options.
Rates on 12-month CDs are on the march. The national average APY is 2.44%, up two basis points from last week and one basis point from a month before.
The current national high for a 12-month CD is 5.25% which would earn around $$1,350 in interest with a $25,000 deposit.
Two-year CD rates
Rates on two-year CDs have remained fairly stable.
The national average APY is 2.52%, the same as a week ago.
The current national high for a 24-month CD is 4.55% 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 4.55% you’d earn about $$2,380 in interest.
Three-year CD rates
The national average APY for a three-year CD stands at 2.70%. That’s down from last week and from 2.72% a month ago.
If you invest $25,000 in a 36-month CD at the average rate of 2.70%, you’d earn about $2,110 in interest.
Five-year CD rates
Yields on five-year CDs are moving down this week. The national average APY is 2.80%, down from last week. It’s down from 2.82% last month.
If you were to lock in a rate at the average of 2.80%, you’d earn around $3,700 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.
