Are CDs worth it?

In the world of deposit accounts, certificates of deposit (CDs) set the standard for reliability. You're guaranteed a specific annual percentage yield (APY) on your money no matter how wildly interest rates rise and fall, and—assuming your CD is with an FDIC-insured institution—you don't have to worry about losing your principal.  

But CDs also come with many limitations and rules that may be a hassle for account holders, like being unable to withdraw before a certain amount of time — or maturity date. Knowing what you're looking for to save money can help you decide if a CD is worth it.   

CNBC Select breaks down the advantages and disadvantages of saving money in a CD and what to consider before opening one.    

If you're looking to store your savings in a CD, you can choose from many varieties, such as traditional CDs, specialty CDs and brokered CDs. Traditional CDs allow you to deposit money at a fixed rate for a set period, ranging from seven days to ten years. Usually, the longer the term, the higher the APY.  

First National Bank of America CD, CNBC Select's pick for the best one-year CD, earns a 4.45% APY special as of writing. The Ally Bank High Yield CD also offers 4.10% APY for their 5-year CD.  

Because you can't withdraw from traditional CDs before the maturity date without paying a penalty fee, depositors who want more liquidity should check out some specialty CDs. No-penalty CDs, for example, allow you to easily withdraw money before the maturity date without paying the fee. 

Brokered CDs, which are sold through a brokerage firm, offer greater liquidity because they can be traded like bonds on the secondary market. However, you're also more at risk because you could lose money if you sell before the maturity date when interest rates rise.  

• Higher APY: CDs typically offer a higher APY than traditional savings accounts or money market accounts. As a result of the rate hikes by the Federal Reserve, the national average one-year CD rate in 2023 is 1.72 percent, up from 0.3 percent the previous year. In contrast, the national savings average on high-yield savings accounts is 0.42 percent (as of this writing).

• Fixed rate: CDs have a fixed rate, unlike high-yield savings accounts, which have variable APYs. You get the biggest benefit from CDs when you lock in a high rate upon account opening, especially if interest rates fall afterward.  

• CD Laddering: While CDs with longer terms offer higher APYs, you can use a strategy called "CD laddering" to enjoy the benefits of CDs while minimizing their drawbacks. Instead of putting a large amount of money into a single CD account, you can create multiple CDs with varying maturity dates. Done right, you'll always have some money freed up to either put back in CDs or spend how you see fit.

• Minimum deposits: CDs typically allow for only one initial deposit to be made, except for add-on CDs. And while many CDs require low minimum deposits, others require a higher deposit to earn a higher interest rate. Brokered CDs, for instance, may require a deposit of $10,000 or more.

• Early withdrawal penalty: Banks and credit unions often charge a fee if you withdraw money before the maturity date. These withdrawal penalties typically depend on what your financial institution assesses, whether it's calculated monthly or daily, on your total balance or the amount of your withdrawal. Some institutions also don't allow any partial early withdrawals, meaning you may have to take out the full amount. 

• Less liquidity: Although CDs will safely grow your money, you also have less access than you would with a savings account. Otherwise, if you need your money sooner, a high-yield savings account may be a better option.

CDs are a great option for storing your money in a principal-protected savings vehicle for the long term, especially if you can lock in a high rate. While a traditional CD's lack of liquidity can be seen as a drawback, it also keeps you from dipping into your funds prematurely for an impulse purchase. It can also be good to store it for a short period with a CD that offers six to 18 months of maturity. If you're worried that rates could increase after opening your account (which means you've locked your savings into earning a lower rate than you would otherwise get), you could opt for a bump-up or step-up CD. In general, these specialty CDs let you request the bank or credit union raise your APY under certain circumstances (such as if the financial institution has increased its rates on similar CDs). 

If you're concerned about not being able to easily and quickly access your money, you can put your cash in an account type that better meets your needs. For example, if you have an emergency fund, keep it in a savings account rather than a CD so you can withdraw from it whenever needed.  

While CDs provide great security and can offer a higher APY than a high-yield savings account, you still may not get the best return possible for your money through a CD. This is because even though you don't have to worry about losing your principal, you could miss out on new CD offerings and a higher rate if rates rise. Instead, it may be best to diversify your funds by building wealth with other assets and use CDs for a portion of your portfolio. 

If a CD account isn't the best option for storing your money, other alternatives, such as high-yield savings and money market accounts, may also work well. CNBC Select ranked the Western Alliance Bank High-Yield Savings Account as the best high-yield savings account for its high APY of 3.80% with no monthly fees and low minimum deposit requirements. The Marcus by Goldman Sachs High Yield Online Savings also ranked as the best high-yield savings account for no fees. 

Money market accounts — or MMAs — could also significantly grow your funds as the national APY is currently 0.44% for deposits under $100,000, according to the Federal Deposit Insurance Corporation (FDIC). Unlike brick-and-mortar savings accounts, high-yield accounts and CDs, MMAs offer checking account features such as check-writing privileges, debit cards and ATM access with out-of-network fee reimbursements.

The Ally Bank Money Market Account offers a 3.00% APY with no minimum balance or monthly fees and up to 6 free withdrawals or transfers per statement cycle.

CDs are a great savings vehicle if you're able to lock away your funds for a set period where you'd earn more in interest than other savings accounts. But because you'd have less access to your money than those accounts, it's important to consider what you're looking for with your savings and the types of CDs available. If you'd prefer more access to your funds, then a high-yield savings account may be a better deposit account for you. Just remember, you don't have to pick one or the other— having different accounts for different goals is usually the way to go. 

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