CDs vs. Savings Accounts: Understanding the Key Differences

If you’re looking for an option to grow your money with a more predictable rate of return than some other investment options, a savings account or certificate of deposit could be right for you.

Savings accounts and certificates of deposit can both put your money to work for you by earning interest while avoiding the market risk you might be exposed to with other types of investments.

But there are key differences between a CD and savings account that you should note if you’re considering these two options: what annual percentage yield these two options offer and how easy it is to access your money from the account.

Let’s take a look at how each type of account works and compare them to help you identify the best option for your savings needs and goals.

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1. How does a savings account work?
2. How does a CD work?
3. Are CDs better than savings accounts?
4. Next steps

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How does a savings account work?

A savings account is a type of bank account that allows you to set money aside and earn interest on it until you withdraw funds. The interest rate you’ll earn on your savings will vary based on the federal funds rate set by the Federal Reserve. You may end up with a higher or lower annual percentage yield, or APY, depending on whether interest rates move up or down.

Banks and credit unions offer different types of savings accounts, including traditional and high-yield savings accounts.

• Traditional savings account — This type of account generally earns a very low APY. As of October 2020, these accounts can have interest rates as low as 0.01%.
• High yield savings account — A high-yield savings account generally earns a higher APY, though these rates can change throughout the year. As of October 2020, APYs generally range from 0.4% to about 0.7%.

Who should open a savings account?

If you’re looking to create an emergency fund or save for short-term goals such as a vacation, a savings account may be a good option. You’ll be able to earn interest on your money — so long as you keep it in the account — and withdraw or transfer your money when you need it.

How does a CD work?

A CD is a type of account that requires you keep your money in it for a specific period of time, until what is known as the maturity date. As with a traditional savings account, you earn interest on the money that remains in the account — but your APY generally depends on your maturity date, which can vary from a few months to even 15 or 20 years from the date you open the CD. And CD rates may be fixed or variable.

Once your CD matures, you can either cash it in and receive your money (plus interest earned), or you may be able to do a rollover or renewal of your CD into a new CD to continue investing.

Banks and credit unions may offer a range of CD types.

• Traditional CDs: With a traditional CD, you’ll pay a penalty if you withdraw your money before the maturity date. You could choose an earlier maturity date, but keep in mind that the longer you’re willing to let the CD grow, the higher your APY will generally be.
• Callable CDs: These CDs also have a maturity date, but they allow the issuing bank to close out — or “call” — the account before its possible end date. This could happen, for example, if interest rates fell. If this happens, you’ll get back the money you invested initially, plus any accrued interest. But you’ll have to find a new CD to put your money in afterward.
• Brokered CDs: These CDs are sold by third-party “deposit brokers” rather than banks or credit unions. While they may promise a higher APY, they also carry greater risk because deposit brokers aren’t licensed or certified, and they aren’t approved by any state or federal agencies.

Who should open a CD?

If you’re looking to save your money for a longer-term savings goal, a CD may be a good option for you. It allows your money to grow at a higher APY than with a traditional savings account in exchange for keeping your cash in the account for a set period of time.

Are CDs better than savings accounts?

Not necessarily. You should have a financial goal in mind when considering whether a CD or a savings account will help you grow your money in the way you want.

Here are some of the key differences between CDs and traditional savings accounts.

CDs vs. savings accounts: What’s the difference?

Certificates of deposit

Savings accounts

APY generally higher

APYs typically lower (unless it’s a high-yield account)

Minimum deposits typically a few hundred or thousand dollars

Minimum deposits typically a few dollars

Accounts are a time deposit lasting anywhere from 15 to 20 years

No minimum time required for accounts to be open

Typically have early withdrawal penalties

No early withdrawal penalties, but may have minimum balance fees

Annual percentage yield

Generally, CDs will offer a higher APY than a savings account, but this might not always be the case. If you have a high-yield savings account, it may offer an APY that’s close to the rates you might see with a CD.

Required minimum deposit

A CD will require a minimum deposit to open the account. This could range from a few hundred dollars to a few thousand, depending on the financial institution.

Savings accounts may have a low minimum deposit requirement, such as $25, to open an account — or it might not have any minimum deposit requirement at all. But you may be charged a monthly fee if you don’t maintain a minimum balance. These fees also depend on the bank, credit union or other institution where your money is deposited.

Access to your money

Savings accounts typically don’t require you to keep your money in the account for a set period of time. But CDs typically require you to keep your funds in the account until the maturity date, which can range from a few months to 20 years.

CDs generally have an early withdrawal penalty that applies if you try to take any of your money out of the account before its maturity date. The penalty varies depending on the financial institution.

Savings accounts offer more flexibility when it comes to accessing your money. You may be able to make transfers to other linked bank accounts or withdrawals from an ATM with a debit card.

But keep in mind that Regulation D limits the number of transfers or withdrawals from your savings account to six each month. If you exceed this limit, your bank may charge a fee or close your account.

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Next steps

Your savings goals and how much access you need to your funds will determine whether a CD or a savings account could be right for you.

Remember that no matter which option you choose, your CD or savings account should be insured by the FDIC or NCUA. This insurance protects your money — up to at least $250,000 — in the event something happens to the financial institution holding your money.

And, if you’re still unsure whether a CD or a savings account is right for you, you might want to consider an alternate savings option such as a money market account.