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Banking

Fed raises rates again — why this is the perfect time to open a flexible CD

Flexible CDs allow savers to earn a higher interest rate or withdraw early with no penalty.

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Wong Yu Liang | Moment | Getty Images

On Wednesday, the Federal Reserve announced a quarter-percentage point increase in its benchmark interest rate, bringing it now above 5%. This rate hike marks a 16-year high and the 10th consecutive raise since the Fed began raising rates from near zero in March 2022.

The top high-yield savings accounts have already been offering an APY as high as around 5% to 6%, but some CDs are worth savers' attention, as well — especially in a changing-rate environment. We're specifically talking here about flexible, or "flex," CDs.

This type of CD differs from the standard CD in that it offers savers more freedom with their money, whether that be the ability to score a variable rate rather than a fixed one, to opt into a higher rate when offered during the CD term or to pull out your cash at no cost. If the Fed does indeed pause future rate hikes, which has been signaled, this last option is helpful if you want to move your cash elsewhere with a better return.

Banks may use the term "flex CD" differently, but these CDs can typically be grouped between three categories: variable-rate CDs, bump-up CDs and no-penalty CDs. Below, CNBC Select breaks down what you need to know about their offerings and how they can help you during this time.

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Variable-rate CDs

Variable-rate CDs are similar to traditional CDs in that they lock up your money for a fixed term, but instead of offering a fixed interest rate for the length of the term, they offer a fluctuating rate that can go up and down at any time — including when the Fed makes changes to their benchmark rate. This means they're a natural pick in a rising-rate environment, but less so when rates go down.

For example, the Merchants Bank™ of Indiana Flex Index CD immediately allows deposit account holders to earn more when the Fed raises rates. The bank is currently offering a generous 5.39% variable APY, and savers can choose from a 12-month, 24-month or 36-month CD term. There is a minimum $1,000 deposit required to open an account and to earn the high APY, but this benefits you in the end; the greater your balance the likely higher earnings you'll have. There may be a penalty for early withdrawal.

Merchants Bank™ of Indiana Flex Index CD

Merchants Bank™ of Indiana is a Member FDIC.
  • Annual Percentage Yield (APY)

    5.65% variable APY with 12-month, 24-month or 36-month CD term

  • Minimum deposit

    $1,000 to open account and earn APY

  • Monthly fee

    None

  • Early withdrawal penalty fee

    There may be a penalty for early withdrawal

Terms apply.

Bump-up CDs

Bump-up CDs can be considered a type of variable-rate CD. These CDs allow savers to take advantage when interest rates rise, aka now. Normally, you would be locked into a fixed interest rate, but a bump-up CD allows you to ask the bank for a higher rate if they end up offering one during your term.

For example, if you opened a three-year CD, and after one year the bank raises the interest rate offered on that product, you could opt into that higher rate for the remaining two years of your term.

Most banks offering bump-up CDs only allow you to opt-in once per CD term. Before choosing a bump-up CD, make sure to also compare the starting APY to the bank's traditional CD's APY. If it's lower, then you may end up just bumping the APY to the traditional CD rate down the road.

You may also come across step-up CDs, which are similar to bump-up CDs, with the caveat that the bank automatically raises your interest rate to the new, higher yield at specific times during your loan term. Savers don't need to ask the bank in order to opt in to the higher rate.

Some banks that offer bump-up CDs include Ally Bank, Marcus by Goldman Sachs and Synchrony Bank, but as with variable CDs, they're generally harder to find than other types of CDs.

No-penalty CDs

If you're worried about not being able to tap into your savings in this uncertain market or if rate increases stop and you want to put your cash into a higher-earning account, a no-penalty CD can help. No-penalty CDs are more convenient than traditional CDs, allowing you to easily withdraw money before your CD term ends without having to pay the typical penalty fee.

There are still some withdrawal rules: Most banks have timeline requirements that prevent you from withdrawing penalty-free for at least seven days after you open the account.

Gordon Achtermann, CFP at Your Best Path Financial Planning, recommends no-penalty CDs when saving up or the short term, such as a year or less because you can access your money on a whim.

For example, the Ally Bank® No Penalty CD. There's no minimum deposit required to open an account and you can withdraw your full balance and interest any time after the first six days of funding your CD.

Ally Bank® CDs

Ally Bank® is a Member FDIC.
  • Annual Percentage Yield (APY)

    From 3.00% to 4.50% APY

  • Terms

    From 3 months to 5 years

  • Minimum balance

    None

  • Monthly fee

    None

  • Early withdrawal penalty fee

    High Yield CDs and Raise Your Rate CDs have early withdrawal penalties that vary based on your CD term. With the No Penalty CD, withdraw all your money any time after the first 6 days following the date you funded the account and keep the interest earned with no penalty.

Terms apply.

No-penalty CDs often come with lower interest rates, which is something to take into account before opening one. If you really think you'll need access to your cash, you may be better off putting it into a high-yield savings account.

Why high-yield savings accounts and treasury bills offer a good alternative

With some standout high-yield savings reaching 5% APY — and even 6% APY in some cases — CDs may not always have the upper hand. Here are some of the highest-paying accounts:

Western Alliance Bank High-Yield Savings Account

Western Alliance Bank is a Member FDIC.
  • Annual Percentage Yield (APY)

    5.22% APY

  • Minimum balance

    $1 minimum deposit

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 transactions each month

  • Excessive transactions fee

    The bank may charge fees for non-sufficient funds

  • Overdraft fee

    No overdraft fee

  • Offer checking account?

    No

  • Offer ATM card?

    No

Terms apply.

Newtek Bank Personal High Yield Savings

Newtek Bank is a Member FDIC.
  • Annual Percentage Yield (APY)

    5.25% APY

  • Minimum balance

    $0.01 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle; transaction amount limits apply; withdrawals from your account can only be transferred to the original external funding source

  • Excessive transactions fee

    None

  • Overdraft fee

    None

  • Offer checking account?

    Only a business checking account

  • Offer ATM card?

    Yes, if have a Newtek checking account

Terms apply.

UFB Secure Savings

UFB Secure Savings is offered by Axos Bank ® , a Member FDIC.
  • Annual Percentage Yield (APY)

    Up to 5.25% APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to 0.20% APY on savings

  • Minimum balance

    $0, no minimum deposit or balance needed for savings

  • Fees

    No monthly maintenance or service fees

  • Overdraft fee

    Overdraft fees may be charged, according to the terms; overdraft protection available

  • ATM access

    Free ATM card with unlimited withdrawals

  • Maximum transactions

    6 per month; terms apply

  • Terms apply.

Treasury bills, or T-bills, are another option to consider. They're nearly risk-free and highly liquid, which means they're very safe places to park the cash you'll need soon. Keep in mind, however, that T-bill returns typically react inversely with the Fed benchmark rate; a higher rate set by the Fed means lower returns on T-bills. In contrast, high-yield savings and CDs usually raise their rates as the benchmark rate goes up. For this reason, T-bills may be a good option if rates stop rising.

You can purchase T-bills directly from the government via TreasuryDirect.gov or through brokerages like Fidelity and Charles Schwab.

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

Charles Schwab

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit

  • Fees

    Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract

  • Bonus

    None

  • Investment vehicles

    Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Extensive retirement planning tools

Terms apply.

Bottom line

A flex CD offers flexibility when it comes to wanting to earn a higher return as the Fed raises rates or wanting to access your cash with no penalty if rate hikes stop. Shop around to choose the best CD for you.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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