When CDs Make Sense…And When They Don’t

Certificates of Deposit (CDs) are often recommended as a “safe” place to park money. But safe for what? Safe from market volatility? Yes. Safe from opportunity cost? Not necessarily. 

The better question: what are you trying to accomplish, and on what timeline? 

CDs can play a useful role in a financial plan, but whether they’re appropriate depends largely on your goals, timeline, and need for flexibility. 

When CDs often make sense 

CDs tend to be most attractive when two conditions are true: you cannot afford to lose the principal balance, and you don’t need access to the money during the CD’s term. 

Unlike stocks or bond funds, CDs typically offer a fixed interest rate and return your principal plus interest at maturity, assuming the issuing bank remains solvent and the deposit is within FDIC insurance limits. Because of that structure, they can be appropriate for funds earmarked for a specific purpose where preservation of capital is the top priority. 

Another reason investors consider CDs is yield. At times, CDs offer higher interest rates than high-yield savings accounts (HYSAs). When that spread exists, locking in a higher rate for a fixed period can be attractive. However, it’s important to note that this isn’t always the case, there are periods when HYSAs offer similar or even better yields while maintaining full liquidity. 

Understanding what you’re actually getting 

When you purchase a CD, here’s what you’re typically getting: 

• A fixed interest rate for a specified term 
• FDIC insurance (within applicable limits—currently $250,000 per depositor, per institution, per ownership category) 
• Your principal returned at maturity, assuming the bank remains solvent 
• Early withdrawal penalties or forfeited interest if you need to access the funds before the CD matures 

That last point is worth emphasizing. If your circumstances change and you need the money before the term ends, early withdrawal penalties can affect your returns…sometimes significantly. 

Brokered CDs: A different animal 

Many investors are familiar with CDs offered directly by banks, but CDs can also be purchased through brokerage firms. These are known as brokered CDs. 

Brokered CDs often provide access to a wider range of issuing banks and maturities, which can allow investors to shop for more competitive yields. However, there are important features to evaluate when considering them: 

• FDIC Insurance: Always confirm the CD is FDIC-insured and that your total deposits at that issuing bank remain within the applicable insurance limits. Just because you purchased the CD through a brokerage doesn’t change the FDIC coverage, it’s still based on your total deposits at the underlying bank. 
• Call Protection: Some brokered CDs are callable, meaning the issuing bank has the option to redeem the CD before maturity, usually if interest rates fall. This can affect your expected return if the CD is called early. If you want certainty around the term, look for non-callable CDs. 

CD ladder strategy 

One common way investors use CDs is through a CD ladder. This strategy spreads funds across multiple CDs with different maturity dates. 

For example, instead of putting $50,000 into a single five-year CD, an investor might allocate $10,000 each into CDs maturing in 1, 2, 3, 4, and 5 years. 

As each CD matures, the proceeds can be reinvested into a new longer-term CD. When the 1-year CD matures, you might purchase another 5-year CD with those proceeds. Over time, this creates a rolling structure that attempts to balance yield opportunities with periodic access to funds. 

CD barbell strategy 

Another approach is the CD barbell strategy. Instead of spreading investments evenly across maturities, this strategy focuses on two ends of the maturity spectrum. 

For example, an investor might place half their funds into short-term CDs and the other half into longer-term CDs, skipping the middle maturities. The shorter-term side provides liquidity and the opportunity to reinvest if interest rates rise, while the longer-term CDs attempt to lock in higher yields if rates fall. 

The comparison worth making 

Before committing funds to a CD, it’s worth comparing them with alternatives: 

• CDs vs. High-Yield Savings Accounts: HYSAs offer liquidity—you can access your funds anytime without penalty. CDs may offer higher yields at times, but you’re locked in for the term. Which matters more for this specific goal: yield or accessibility? 
• CDs vs. Treasuries: U.S. Treasury securities are backed by the full faith and credit of the U.S. government. Interest from Treasuries is exempt from state and local taxes, while CD interest is not. Depending on your state tax rate, that difference can be meaningful. 
• CDs vs. Short-Term Bond Funds: Bond funds offer different return characteristics—potentially higher returns, but with market risk and no guarantee of principal. If you need the principal to be there at a specific date, bond funds may not be appropriate. 

The appropriate choice depends on your goal, timeline, liquidity needs, tax situation, and the current interest rate environment. 

Rounding it out 

CDs are a tool—useful in certain contexts, limiting in others. They can be appropriate when preserving principal and earning a predictable return are the primary goals. However, they’re just one option among many.

The question isn’t “are CDs good?” It’s “are they appropriate for this specific goal?” 

If you’d like to talk through goal-based savings strategies and how different tools might fit your situation, OpenPlan’s financial planning service may be a great fit for your needs. Reach out to learn more about our team of CERTIFIED FINANCIAL PLANNERS® and how their guidance can help you. 

Disclosure: This content is for informational and educational purposes only and should not be construed as individualized advice or a recommendation for any specific product, strategy, or course of action. Brighton Jones, its affiliates, and employees do not provide personalized investment, financial, tax, or legal advice through this communication. This material is not intended to, and does not, create a fiduciary relationship under ERISA or any other applicable law. For individualized advice tailored to your specific circumstances, please consult with your adviser.