5 Smart Tips for Maximizing Returns on CDs

Many of today’s best certificates of deposit (CDs) offer competitive rates that can generate stellar returns. As long as you’re cool with locking your money up for a specific period of time, you can help your money grow at high rates that may not be here for long. If you’ve been contemplating getting a CD for 2024, here are five ways you can maximize your returns.

1. Build a CD ladder

A CD ladder involves purchasing multiple CDs with staggered terms in order to capitalize on high rates while maintaining access to your savings. For example, if you had $20,000, you could buy four CDs, each with maturity dates separated by six months:

This is different than, say, investing $20,000 in a single 2-year CD, which might put you at a disadvantage if you needed to access your money early.

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CD laddering has always been a smart strategy, but it’s especially savvy with today’s rates. That’s because the best CDs on the market today have shorter terms, like 12 months or less. By getting a string of short-term CDs, you can preserve access to your money while also earning maximum interest.

2. Don’t withdraw interest

While you can’t withdraw your principal (the part you deposit into your CD) penalty free, most banks let you withdraw the interest you earn. More often than not, you’ll see this on long-term CDs (those with terms longer than 12 months) but some short-term CDs may let you cash out interest, too.

Withdrawing interest is fine if you really need the money. But if you don’t need the money, cashing in on interest early could work against you. That’s because interest withdrawals can reduce a CD’s stated APY. As long as your CD earnings grow by compound interest (and most do), any withdrawals will leave less in the pot to grow. Your principal will still grow money, but you might have slightly less than you were expecting by the end of your CD’s term.

3. Consider a no-penalty CD

No-penalty CDs let you liquidate your CD early without paying penalties or fees. This can be a smart choice if you don’t have a lot of savings but want to lock in competitive rates while you still can.

Traditionally, no-penalty CDs had lower APYs than other CD types. But these days you can find several no-penalty CDs with very competitive rates. For example, the financial platform Raisin has several no-penalty CDs paying out at APYs above 5%, including a 4-month CD by Ponce Bank with a 5.30% rate.

4. Invest in brokered CD

Brokered CDs are available through brokerage accounts. They share many benefits with traditional bank CDs, like guaranteed returns and competitive interest rates. The big difference, however, is that you don’t pay penalties to liquidate your brokered CD. Instead, you can trade it on a secondary market, which could lead to a profit or loss.

Since rates appear as if they will decrease later this year, buying a long-term brokered CD could result in a healthy gain later. Plus, if you hold the brokered CD in an IRA account, you won’t have to pay federal taxes on your gains.

A few examples of brokered CDs include:

5. Get a high yield CD ASAP

CD rates might be competitive right now, but there’s no telling how long they’ll stay this high. In fact, if economic conditions continue to improve, we might see a collective drop in CD rates later this year.

Keep in mind that CD rates are only this high because the Federal Reserve hoisted its fund rate to fight inflation. Since banks use the fund rate to set their own rates on savings accounts and CDs, any change to that rate will likewise affect CD rates. Although inflation remained stubbornly high in January 2024, most forecasters still predict at least one rate cut before the end of December.

Whether the Federal Reserve does cut interest rates this year, banks will start preparing for the day when they do. That means, we could see a drop in CD rates even before the central bank makes that crucial decision. Some banks, in fact, have already started to cut CD rates. For example, earlier this month NBKC Bank cut its 7-month CD rate from 5.50% to 5.25%.

All in all, if you want to maximize your CD earnings in 2024, now might be the time to lock in today’s rates before it’s too late. As long as you know a CD is the right investment for you, you could extend today’s high rates farther into the future.

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