High-yield savings account vs. CD: What to know when rates are high

Today’s high-yield savings accounts and certificates of deposit offer interest rates that are more than 10 times the national average APY of 0.47% reported by the FDIC. HYSAs and CDs provide a safe, stable way to plan for a family vacation, contribute to a loved one’s college savings, save toward retirement or build an emergency fund. And they’re easy to find at banks, credit unions and digital banking platforms like Ally Financial or SoFi.

While HYSAs allow for flexible access to your money, CDs tend to attract higher rates of returns, among a few other key differences. Here’s how to compare these two savings products to find the best for your budget and financial goals.

What is a high-yield savings account?

A high-yield savings account — or an HYSA — helps you earn a higher rate of interest on your deposit than with a traditional savings account. The rate of interest is expressed as the annual percentage yield, or APY, which is the earnings you can expect on your savings in a year, including compound interest. The higher your APY, the faster your money will grow.

The interest rate on a high-yield savings account is variable, meaning it can increase or decrease at any time, depending on market conditions, much like a traditional savings account. And while the Federal Reserve used to limit withdrawals from these accounts to six a month, that limitation is suspended in the wake of the pandemic, offering you more flexible access to your money without penalties or fees (though read your account’s fine print to confirm).

You can open a high-yield savings account with most banks and credit unions, though you’re likely to find the highest rates with a digital or online bank. While some high-yield accounts require a minimum opening deposit to earn the highest advertised APY, you can find many accounts with opening deposits as low as $100. And you can rest assured your money is safe: Deposits in high-yield savings accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) — or the National Credit Union Administration (NCUA) for accounts at a credit union.

Benefits of an HYSA

• High rates of return. Earn significantly higher interest on your deposit investment — more than 10 times the national average savings rate — when compared to a traditional savings account.

• No or low fees. The best high-yield savings accounts come with few fees and low minimum deposit requirements, making it easy to maintain your account long term.

• Flexible access to your money. Withdraw or add to your HYSA as needed without penalty — though read your account’s find print for any limitations.

• Federally insured up to $250,000. High-yield savings account deposits are insured by the FDIC or the NCUA for up to $250,000 per person, per account.

Drawbacks of an HYSA

• Variable rate can change. Savings account rates can increase or decrease at any time based on market conditions. 

• Transfers may not be instant. Depending on the bank, you may need to wait up to three days for transfers to or from your account to clear. Though many banks — like American Express — allow you to link to your everyday bank for a faster way to move your money.

• Limited deposit and withdrawal options. Online banks don’t typically have their own branches or ATMs — instead, they partner with existing ATM networks. To deposit cash, you’ll need to find an in-network ATM that accepts deposits or deposit the cash into a linked account and then transfer money to your savings electronically.

• May require minimum opening deposit. Some high-yield savings accounts require a high opening deposit to earn the highest advertised APY. For example, Brio Direct requires a $5,000 minimum balance to earn its high APY. Understand the account’s terms and conditions before signing up.

What is a certificate of deposit?

A certificate of deposit — called a CD — is a savings account that pays a fixed rate of interest on an initial deposit that you agree to lock away for an agreed-on period of time. CD terms can range from one month to five years or longer. Typically the higher your deposit amount, the higher the APY, with the best rates offered by online banks or digital accounts.

Unlike a traditional or high-yield savings account, the APY on a CD is fixed, which means it won’t increase or decrease over the life of your CD. After your CD matures — or the term expires — you receive your initial deposit back plus interest.

If you find yourself needing to access your money before your CD matures, you can “break” the CD by paying what’s called a withdrawal penalty. This penalty is a fee expressed in months of interest you’re giving up — for example, 180 days of interest on a 24-month CD. Generally, the longer the term, the higher the penalty fee.

Like a high-yield savings account, CDs are insured up to $250,000 by the FDIC or NCUA, depending on whether your account is with a bank or a credit union.

Benefits of a CD

• Guaranteed rate of return. With a CD, you make one deposit and earn a guaranteed interest rate over a specified term that’s yours after the CD matures.

• Boosted savings rates. Many banks and financial institutions offer CDs at rates that are higher than you’ll earn with the average savings or money market account — with digital and online banks offering the highest rates on average.

• Choose from a range of CD terms. You can find terms of three months to five years or longer to fit your financial goals. Rates for six-month CDs can outpace the average bank account, and longer terms offer rates comparable to high-yield accounts.

Drawbacks of a CD

• Withdrawal penalties. If you need to access your money before your CD term matures, you face fees equal to as much as three to six months’ worth of interest, depending on the account.

• Not the highest investment returns. CDs are a safe way to steadily earn interest with a guaranteed rate of return, but returns are modest when compared with more volatile investments like stocks. And by locking your money in a CD, you could miss out if average rates increase.

• You can’t add to your CD. After your CD locks, you aren’t able to add more money until after the CD matures — at which point, you roll it over to a new CD or a different account.

High-yield savings account vs. certificate of deposit: How they compare

HYSAs and CD accounts offer higher rates of return than a traditional savings account with differences in access, flexibility and how interest is earned.

HYSAs and CDs: Both can benefit your savings budget

While rates continue to hit historic highs, APYs are predicted to fall over the summer. It could benefit your budget to include both a high-yield savings account and a certificate of deposit in your savings plan.

A high-yield savings account offers significantly higher rates than you’d find with a traditional savings account without worry over access to your money. And you won’t miss out if interest rates increase. These accounts are ideal for storing long-term savings, with most banks allowing you to move money easily between an everyday account — like a savings account with a brick-and-mortar bank — through online banking or an app.

A certificate of deposit is a tool that can help you to lock in historically high rates. Your money will continue earning a fixed APY over the life of your CD, protecting your savings against rate drops. Think about how much money you can afford to lock away, and choose a term offering the highest rate available on that deposit amount. While it used to be true that higher deposits attracted higher rates, in today’s market you can find rates that exceed 5% APY on terms of 12 to 18 months.

Dig deeper: What is a CD ladder? How to build one — and capture high rates before they drop

Sources

• National Rates and Rate Caps, FDIC. Accessed March 18, 2024.

About the writer

Kelly Suzan Waggoner is personal finance editor at AOL. Before joining AOL, Kelly was managing editor at Bankrate and editor-in-chief at Finder, where she led a team focused on helping people to make unfamiliar financial decisions around banking, lending, credit cards, investments and more. In addition to Bankrate and Finder, Kelly’s expertise has been featured in Nasdaq, Lifehacker and other publications. Today, she's dedicated to empowering those planning for, newly entering or fully enjoying retirement to get the most out of their finances — whether that's saving money, managing debt, maximizing rewards or growing their wealth.