A five-year certificate of deposit is a low-risk way to set money aside you won’t need in the next five years. You’ll earn a guaranteed rate on your savings in exchange for locking up your funds for five years.
“If someone is looking for a guaranteed interest rate, stability of principal and not concerned with liquidity, then now is probably a good time to lock in a five-year CD,” said Misty Garza, a financial advisor at Bogart Wealth. But if you need more flexibility, consider other interest-earning savings options.
What is a 5-year CD?
A five-year CD is the longest term certificate of deposit most banks offer. It’s a low-risk savings account that lets you earn a return with a fixed annual percentage yield, or APY, in exchange for keeping your money in the account for five years. To compensate for tying your funds up for that period, the bank or credit union usually will often pay a higher rate than it does for shorter terms.
A five-year CD usually offers the highest rate of return of any CD, though right now shorter terms like one-year CDs are offering higher rates. Experts say this is a sign that savings rates have peaked and are unlikely to climb much higher, especially since the Fed paused rates again this month.
Like most traditional CDs, you’ll likely pay an early withdrawal penalty if you withdraw money before your CD term ends. The fee is usually a few months’ worth of interest. But because five-year CDs are generally the longest terms offered, it’s important to make sure you won’t need the money before then. Otherwise, you may be on the hook for up to a year’s worth of interest earned -- even if you haven’t earned that much yet.
|First Internet Bank of Indiana||4.59%||$1,000|
|First National Bank of America||4.75%||$1,000|
More details on the top 5-year CD rates
Is now a good time to lock in a 5-year CD?
Five-year CD rates are high but have remained unchanged for most banks since May -- with the most competitive rates hovering around 4.50%. While you can find better rates for select short-term CDs right now, a five-year CD offers a competitive edge.
“The advantage of locking in a long-term CD in this current environment is that you will be protected when interest rates start to decrease,” Garza said. “The only real disadvantage to a longer-term CD right now is the potential for rates to continue to climb. I would say most investment professionals believe we are at the tail-end though.”
Even if rates do continue to inch up, trying to time when to lock in a CD at the absolute highest rate can leave you earning less on your savings in the meantime. The difference in a few basis points may not be worth the tens of extra dollars in interest you might earn -- unless you’re depositing tens of thousands. For example, here’s how much you could earn on a $1,000 deposit if you open a five-year CD with a 4.13% APY versus if rates go up to 5%.
In this example, if you wait and CD rates rise, you’d earn only $52 extra dollars on your savings over five years. Unless you have a large amount to deposit, waiting likely won’t make you much more money.
How to choose a 5-year CD
Most banks and credit unions offer five-year CDs, but online-only banks usually offer the best rates. Every bank has different requirements. Some require a minimum deposit, while others have a higher APY. Others may also have hefty withdrawal penalties that can cost a lot if you need to take the money out unexpectedly. Here are a few things to look for when choosing a CD:
- A competitive fixed interest rate over five years -- regardless of the rate environment.
- A comfortable minimum deposit with minimal fees.
- A low early withdrawal penalty fee in case you need to withdraw the money.
- A CD that is FDIC or NCUA insured up to $250,000 per person, per account category.
Factors to consider before opening a 5-year CD
Opening a five-year CD means you’re willing to keep your deposit locked away for a few years in order to earn interest. But there are a few other factors to take into account.
- Some banks have a hefty withdrawal penalty if you pull out your money before the CD matures or the term ends. Consider a five-year CD with lower penalties.
- You’re locking in the CD rate for a few years. If rates rise, you may be locking in a lower rate, and in return, have less interest than locking in a higher rate.
- You won’t have access to the money for five years unless you pay an early withdrawal penalty -- which is up to a year of interest for some banks that offer this term.
- You might earn more interest in other savings or investment accounts, depending on your goals.
Other savings options to explore
Over the past year, interest rates have climbed quickly, making CDs a good investment for some, Garza said. But most experts believe that CD rates are as high as they’ll go, especially since the Fed is holding rates steady for now. So if you’re interested in locking in a high five-year CD term, now’s the time to act.
But if you’re not ready to deposit a lump sum of money for years, there are other interest-earning savings options that may be a better fit for your goals.
“Interest rates are high, and it’s a good time to be a saver, but it’s not all or none,” said Marguerita Cheng, chief executive officer at Blue Ocean Global Wealth. “You can have a checking and savings account, but you can also have a CD, especially if the terms and minimums fit your needs.”
High-yield savings and money market accounts
Savings options with variable rates like high-yield savings accounts tend to offer more flexibility -- you can deposit and withdraw money regularly without paying an early withdrawal penalty as you would with CDs. A high-yield savings account or a money market account are good options for storing emergency savings or money you need quick access to. You’ll still earn interest but won’t lock in a fixed rate. That means when rates drop, your savings APY likely will too.
Some banks offer bump-up CDs, which let you adjust your APY once (or sometimes multiple times) to lock in a higher APY if rates rise during your CD term. This specialty CD may come in handy if you’re worried about missing out on better rates in the coming weeks. However, bump-up CDs generally have lower rates compared with traditional CDs.
So even though you’ll have a chance at a better rate, you may start with a below-average APY. And you’ll still pay an early withdrawal penalty if you take the money out before the term ends.
If you want a guaranteed fixed rate but want to get your money back sooner to take advantage of higher rates, consider a CD ladder. Here’s how it works.
You’ll spread your deposit across several CDs, usually one-, two-, three-, four- and five-year CD terms, so you’ll have money coming due annually. A ladder can be beneficial if there’s a chance you’ll need funds each year or if you think rates will continue to rise. You can also apply this strategy to shorter-term CDs.
Series I bonds
Lastly, Series I bonds are another safe investment option and are government-backed. I bonds are currently at 5.27% until April 2024. If you apply for one before then, you can lock in this rate for the next six months. But after that, the new rate may drop significantly. An I bond requires you to lock up your money for at least one year, but you should try not to touch your funds before five years, or like a CD, you’ll forfeit some of the interest you earned.
Treasury bills are pretty similar to CDs, but there are some key differences. To start, both low-risk options still require a one-time deposit and limited liquidity.
You’ll have to get a treasury bill through the US Treasury Department and you won’t be able to withdraw funds unless you transfer it to a broker. On the other hand, CDs let you withdraw your money, but you’ll pay an early withdrawal fee if you take money out before the term ends.
Right now, five-year CD rates are on par with treasury bills, with a 4.67% APY as of Nov. 1. Though treasury bill rates update daily, rates have been hovering above 4% for months. While both are similar, you may have more options and flexibility depending on your goals for the money you’re setting aside.
How to open a 5-year CD
When you’re ready to open a CD, most banks let you open your account online. If a physical branch is available, you can also apply in person. You’ll need to provide some of your personal information, such as your full name, Social Security number or Taxpayer Identification number, physical address, and contact information.
When you complete the application, you’ll need a one-time deposit. Before opening your account, do the math to determine the return you want to determine your deposit amount using a CD calculator.
Lastly, check with the bank to see how you can make the deposit -- most require an electronic transfer and don’t accept cash.
CNET reviews CD rates based on the latest APY information from issuer websites. We evaluated CD rates from more than 50 banks, credit unions and financial companies. We selected the CDs with the highest APY for five-year terms from among the organizations we surveyed and considered rates for shorter terms if five-year terms were identical or unavailable.
Banks we reviewed
Alliant Credit Union, Ally Bank, America First FCU, American Express National Bank, Barclays, Bask Bank, Bethpage, BMO Alto, Bread Savings, Capital One, CFG Bank, CIT, CommunityWide Federal Credit Union, Connexus Credit Union, Discover, EverBank, First Internet Bank of Indiana, First National Bank of America, Forbright, Lending Club, Limelight Bank, Marcus by Goldman Sachs, MYSB Direct, NexBank, Popular Bank, Quontic, Rising Bank and Synchrony.
This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.