High-yield savings accounts vs. CDs: What's the difference?

Most banks and credit unions offer certificates of deposit (CDs) to their customers, and providers typically pay out higher interest rates on these compared to traditional savings accounts. In exchange for these higher rates, the investor commits to keeping their money in the account until the maturity date. 

A high-yield savings account (HYSA) is a competing product that also pays a better interest rate than a traditional savings account. We’ll compare both products — CDs versus high-yield savings accounts — to help you choose one that fits your financial goals best.

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What’s a high-yield savings account?

A traditional savings account typically offers an annual percentage yield (APY) of .01% to .05% per year. To put this in perspective, if you place $1,000 in a savings account at the end of the year, you’ll earn 10 to 50 cents in interest. While many people keep some cash in a traditional savings account for an emergency fund, the low interest rates typically don’t keep up with inflation. 

On the other hand, a high-yield savings account (HYSA) offers higher interest rates than a traditional savings account. Financial institutions may sometimes base their HYSA interest rates on the amount you maintain in the account. For example, a high-yield savings account might offer one interest rate for balances less than $250,000 and a higher interest rate if you maintain a balance greater than $250,000. There’s no early withdrawal penalty for taking some or all of your money, and HYSA providers let you keep all the interest you earned. 

The Federal Depository Insurance Corporation (FDIC) insures bank HYSAs, and the National Credit Union Administration (NCUA) insures credit union HYSAs. The FCIC and NCUA insurance limit is $250,000 per account per person. This insurance protects your money against bank insolvency, making a high-yield savings account a safer option for amounts up to $250,000. 

What’s a certificate of deposit?

A CD is another type of savings account that banks or credit unions offer. Here are some of a CD’s core components:

• Principal: This is the amount of funds you deposit into the CD up front. The principal is a lump sum, because CDs usually require a minimum investment amount. 
• Interest rate: This is the fund’s annual interest rate, expressed as a percentage (e.g., 5%).
• Compounding period: The frequency at which the bank adds interest to the investment. The greater the compounding frequency, the higher the CD's annual percentage yield. Say you place $1,000 into two 5% CDs. One compounds annually, and the other compounds quarterly. The CD that compounds annually has an APY of 5%. The CD that compounds quarterly has 5.0945% APY since it starts building on the interest after the first quarter. You’ll frequently see the APY and interest rate posted together on bank websites and advertisements. 
• Penalty: Banks and credit unions typically charge a penalty as a disincentive for early withdrawal. This penalty might be a few months of interest for a short-term CD or a year or more of interest for a long-term CD. This is a key difference when comparing a CD versus a HYSA, which doesn’t carry early withdrawal penalties. Imagine an investor places $5,000 into a five-year 5% CD that compounds annually. The early withdrawal penalty is one year’s interest, or $250. If the investor leaves their funds in the CD until the maturity date, it will be worth $6,381.41. If they withdraw early, the bank or credit union will automatically deduct the penalty amount ($250), even if the CD hasn’t earned that much interest yet. 

High-yield savings account vs. CDs

One of the most significant differences between CDs and high-yield savings accounts is that you can withdraw money from a HYSA without paying a penalty. However, both have advantages and disadvantages:

• Access to funds: A HYSA typically allows you to deposit and withdraw funds at your discretion. Certificates of deposit usually require a lump sum deposit, and you can’t withdraw money until the maturity date without facing a penalty. 
• Interest type: CDs pay a fixed interest rate. HYSAs have variable rates that the bank adjusts periodically. 
• Minimum balances: CDs require a minimum investment amount. HYSAs don’t usually have a minimum deposit, but they may require you to have a high balance — sometimes higher than a CD’s minimum deposit — to receive the best high-yield savings account interest rates. 
• Early withdrawal penalty: CDs almost always have an early withdrawal penalty, but HYSAs don’t. 

CD pros

• Certificates of deposit usually offer a better rate of return. 
• You can lock in higher interest rates.
• The minimum balance may be lower than what you would have to keep in the account to get the best HYSA rates. 

CD cons

• There’s usually a penalty for early withdrawal.
• Most CDs don’t allow you to deposit funds after you open the account. 

HYSA pros

• You have constant access to your funds. 
• You’re able to deposit money at any time. 

HYSA cons

• You may be required to maintain a high balance to get the best interest rates. 
• Some HYSA interest rates are lower than CD interest rates. 
• Flexible rates mean that the account is subject to market & interest rate volatility. (CDs allow you to lock in a rate for a time period whereas HYSAs are subject to flexible rates.)

What’s an annuity?

An annuity is a contract with an insurance company, and it works differently than a CD or high-yield savings account. Annuities have an accumulation phase and a payout phase. During the accumulation phase, your deposit grows. Once the annuity reaches the maturity date, it can enter the distribution phase. Depending on the terms of the contract, you may receive all your money in one lump sum or as a series of payments. 

Say you put a $100,000 initial deposit into a 5% fixed annuity with a maturity date of 10 years that will pay you 240 monthly payments after it matures. During this 10-year period, the value of your annuity grows to $162,889. While it’s paying you monthly payments of $1,075, the remaining balance can still earn interest. 

How do annuities compare to CDs and HYSAs?

Annuities have some advantages compared to CDs or HYSAs, but they also carry some risks.

Annuity pros

• Guaranteed payments: Fixed annuities, like the one in the above example, offer guaranteed interest rates. And even if you choose a variable annuity, once it matures you’ll receive a guaranteed income stream based on the cash value and your life expectancy. 
• Customization: There are many types of annuities. For example, there are qualifying annuities that allow you to defer income taxes, lifetime annuities that pay you until you pass, and joint annuities that pay your surviving partner. 
• Potentially better interest rates: A fixed annuity is similar to a high-yield CD insofar as it locks your money but usually pays a higher interest rate.

Annuity cons

• Less liquidity: Similar to a CD’s early withdrawal penalties, annuities usually have a surrender charge, which discourages withdrawing the deposit before the maturity date. In addition, an IRS 10% penalty may apply if you liquidate your deposit before age 59½ on qualified annuities.
• Not FDIC insured: The FDIC or NCUA don’t insure annuities. These products rely on the issuing insurance company’s claims-paying ability and financial strength.

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This communication / article is for informational / educational purposes only.

It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.

The Gainbridge^® digital platform provides informational and educational resources intended only for self-directed purposes.

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