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High-yield certificates of deposit (CDs) earn a higher interest rate than some other types of savings accounts as an incentive to keep your money invested longer. High-yield CDs can be a good solution for savers who have little appetite for risk but want to grow their money.
What Is a High-Yield CD?
A CD is a type of deposit account. When you purchase a high-yield CD, just like with a regular CD, you invest a fixed sum of money for a period of time, ranging from a few months to several years. High-yield CDs are typically available from banks, credit unions and online banks.
High-yield CDs are similar to traditional CDs in a variety of ways, including their initial deposits, terms and early withdrawal penalties. But where a high-yield CD differs is that it will pay you a higher annual percentage yield (APY) than a traditional CD.
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How Does a High-Yield CD Work?
When you open a high-yield CD, you'll provide a deposit and choose a term length, such as one year, three years or five years. This amount becomes the basis on which you earn interest during the maturity period of your high-yield CD. At the end of the term, you get back your entire initial deposit amount plus any interest earned.
Although minimum deposit amounts vary—many are at or below $5,000 and some CDs have no minimum deposit—APYs can also range from one financial institution to the next. Right now, it's not uncommon to see high-yield CD APYs of well over 4%, depending on the term. This is higher than APYs available from most traditional CDs, often by a few percentage points.
To give you an example of the difference in earnings between a traditional CD and a high-yield CD, say you deposit $1,000 into a 12-month CD. If you put that money into a high-yield CD and earn an APY of 4.5%, you'll earn $45 in interest; with a traditional CD offering a 1.4% APY, you'd earn just $14 in interest. Deposit $25,000 into the same 12-month CD options and you'll earn $1,125 in interest from a high-yield CD, but just $425 in interest with a traditional CD.
If you cash in your CD before it matures, you may pay a penalty, usually expressed in a number of months' worth of interest. However, some institutions may waive the penalty for withdrawing the money before the maturity date if you've held the CD for a minimum period of time.
High-Yield CD vs. High-Yield Savings Account
Both high-yield CDs and high-yield savings accounts provide great places to save. But the best place to keep your money may depend on how long you're willing to leave it in your account. You may get a higher return with a high-yield CD if you choose a longer term. On the other hand, if you need the ability to access your money more regularly, a high-yield savings account may be more convenient.
| High-Yield CDs | High-Yield Savings Account | |
|---|---|---|
| Variable or fixed rate | Locked-in fixed rate for the length of the term, so you'll benefit if rates decrease during the term | Variable rates that can change at any time, so you'll benefit if rates increase |
| Annual percentage yield (APY) | Depends on the financial institution and the length of the CD's term; often, the longer the term, the higher the APY | Depends on your financial institution, how often interest compounds and the amount you hold in the account; some accounts offer a higher APY if you maintain a high balance |
| Minimum deposit | May or may not have a minimum deposit, depending on the bank | May or may not have a minimum deposit, depending on the bank |
| Liquidity | Withdrawing your money before the maturity date could result in a penalty | You'll likely be able to access your money at any time, but may be restricted on the number of withdrawals per month |
Get Your Money's Worth
If you're looking for a low-risk way to earn more interest and generate decent returns—and you don't need access to your money for a set period of time—a high-yield CD might be the answer. The trade-off is that, if you need your money before the maturity date, you could pay a penalty.