What is a 2-year CD?
A two-year CD is a certificate of deposit with a term of 24 months. Unlike regular savings and checking accounts, CDs are illiquid. In exchange for a fixed, higher APY than a savings account, by opening a CD, you are agreeing not to withdraw any money for the account’s term, which in this case would be two years.
When a two-year CD reaches its term, it matures. At this time, you can withdraw your principal and the interest it earned during the term. You can also choose to renew the CD for another two-year term or invest your money in a different CD.
You will likely incur early withdrawal penalties if you withdraw the principal before the CD’s term ends. Financial institutions set early withdrawal penalties for CDs, and they can be substantial. You might forfeit three months or more of interest up to the total amount for the term.
Current 2-year CD rates
The best CD rates on 24-month terms are much higher than the national average for two-year CD rates, which currently stands at 1.58% APY, according to the FDIC. They also surpass the national average savings account rate of 0.46%.
For example, Quontic’s 4.5% APY two-year CD is almost three times higher than the national average two-year CD rate and a whopping 10 times higher than the national average savings account rate. However, the current market environment makes two-year CD rates lower than the best rates for short-term CDs.
How do 2-year CD rates work?
Two-year CD rates are expressed in terms of APY, and unlike the variable interest rate of a traditional savings account, two-year certificate of deposit rates are fixed for the entire term. This means you will enjoy guaranteed earnings if you keep your money in the CD for two years.
However, if you withdraw your money before your CD matures, you will likely incur early withdrawal penalties. These are assessed by banks, credit unions and brokerages when people withdraw their principal before the end of the CD’s term.
The federal government sets a minimum penalty of seven days’ interest, but there is no legal maximum. As a result, financial institutions often set early withdrawal penalties significantly higher than the federal minimum.
Pros and cons of 2-year CDs
Pros explained
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Fixed interest rate for 24 months: The APY on a two-year CD will remain the same for the 24 months that your money is invested regardless of what happens to national CD rates, guaranteeing your earnings.
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Higher APY than savings accounts: The APY on CDs vs savings accounts is much higher, with the national average savings account rate being 0.46%. When you compare that with the rates offered by Barclays CDs or Quontic CDs, you can see the APY is up to 10 times higher than what banks offer for standard savings accounts.
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Predictable earnings: Since the APY is fixed, you can calculate your earnings using a CD calculator and know how much you’ll earn before you deposit. Compare this with the variable interest rates offered by savings accounts that make it impossible to predict your earnings on deposits accurately.
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Safe and virtually risk-free: CDs offered by banks that are members of the FDIC or credit unions that are members of the NCUA are fully federally insured up to the maximum of $250,000. This means your money will be safe, and your CD has virtually no risk, even if the bank fails.
Cons explained
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Locked in at a lower rate even if CD rates rise: While the fixed APY offered by two-year CDs is attractive, the downside is that you’ll be locked in at that rate until the CD matures even if national CD rates rise during its term.
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Can only make one deposit: CDs typically only allow you to make a single deposit. You can’t make deposits over time into the account during its term.
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Early withdrawal penalties if the principal is withdrawn before maturity: If you experience an emergency and are forced to withdraw your principal early, you’ll likely incur significant early withdrawal penalties and forfeit a substantial amount of the interest or even all of it, which can reduce or even eliminate your earnings.
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May wish you’d opted for a longer-term if CD rates fall: If CD APYs fall after you open your account and are expected to remain low for an extended period, you may wish you had chosen a longer term for your CD.
How do 2-year CD rates compare to other terms?
While long-term CD rates have traditionally been higher than those offered by short-term CDs, that is not the case currently. For example, the FDIC reports the current national average rate for a six-month CD as 1.82% and 1.85% for a one-year CD, compared to the national average rate of 1.58% for a two-year CD.
Similarly, banks offering the highest 24-month CD rates also offer higher APYs for CDs with shorter terms. For example, Quontic’s highest rate is 5.10% for its six-month CD and 4.5% for its 12-month and 24-month CDs.
However, CD APYs are slowly beginning to decline. If the Federal Reserve cuts its bench rate, two-year CD rates will likely continue to decrease in 2024. This might mean it’s a good time to purchase a two-year CD at the current CD interest rates.
How to find the best 2-year CD rates
If you plan to open a two-year CD, shopping around to find the best APY is essential. Avoid simply depositing money in a CD at the bank where you have your checking account without searching for the best rates.
Online CDs offered through banks, credit unions and brokerages may offer significantly higher APYs because they do not have the overhead of traditional banks.
When you’re shopping around and comparing offers, consider the following important features:
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APY: The CD’s APY is fixed and shows what you’ll earn during the CD’s term. It also includes the effect of compounding, so look for the highest APY.
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Minimum deposit: Some banks require small minimum deposits while others require sizeable ones, so choose an offer with a deposit you can afford.
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Early withdrawal penalties: Ensure you understand the penalties you’ll face if you withdraw funds early and only deposit the amount you can afford to leave in the account for the entire two-year term.
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Deposit insurance: It’s best to choose a CD offered by a bank or credit union that is a member of the FDIC or NCUA, respectively. This is because your deposits will be insured up to $250,000 in a two-year CD offered by a member bank or credit union.
When is the best time to get a 2-year CD?
The best time to get a two-year CD is when you expect rates to fall and continue to be lower for two or more years. Currently, the Federal Reserve is expected to cut its benchmark, likely resulting in lower CD rates nationally.
However, the right time to open a two-year CD depends on your circumstances. You’ll need to meet the bank’s minimum deposit requirements and have other money set aside for emergencies so you won’t be forced to make early withdrawals.
How to open a 2-year CD
Depending on the financial institution, you can usually open a two-year CD online or in person using the following steps:
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Compare offers and decide which type of CD to open: Choose the CD with the highest APY and minimum deposit requirements you can afford. Decide whether you want to open a single-owner or joint-owner CD account.
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Decide whether you’ll apply online or in-person: Some banks encourage people to apply online, and the process is fast and straightforward.
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Gather your documents: You’ll need to provide the bank with a copy of a valid, government-issued ID, proof of your U.S. residential address and contact information.
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Decide how to handle the interest: You can typically choose to either receive interest payments during the CD’s term or to keep the money in your CD account. It’s best to leave the interest in the account for compounding purposes.
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Submit the application and make your deposit: Complete the application and make your opening deposit. You can do this by transferring funds from your existing bank.
Are 2-year CDs worth it?
Whether a two-year CD is worthwhile depends on a few factors. Opening a CD account could make sense if you already have fully funded your emergency fund and can afford to leave your money in a CD for two years.
A 24-month CD can also be an excellent way to reduce risk in your overall investment portfolio or to save money safely if you are nearing retirement or are otherwise risk-averse. However, there are alternatives to a two-year CD that could provide higher returns or provide more liquidity.
Alternatives to a 2-year CD
Other CD terms
Instead of depositing funds in a two-year CD, you could choose a shorter or longer term. Short-term CDs currently pay higher APYs than two-year CDs, while longer-term CDs pay slightly less.
The advantages of opening a short-term CD include having your money tied up for a shorter time and enjoying higher returns for your money.
However, CD APYs may continue to drop if the Federal Reserve cuts its federal benchmark, so it might make sense to park your money in a CD with a term of two or more years if you anticipate rates to fall.
Savings accounts
Savings accounts offered by brick-and-mortar banks offer convenience and liquidity but also pay very low variable interest rates. A traditional savings account is a good option if you are saving for an emergency fund and need access to your money, but there are better options if you want to realize net gains.
Another option is to open a high-yield savings account online. Many of these accounts offer competitive APYs similar to those provided by CDs. Online savings accounts are also liquid and allow you to transfer funds to your bank when needed.
However, high-yield savings accounts have variable interest rates, so your returns won’t be guaranteed. The interest rate could fall, leaving you earning less money than you initially thought.
Money market accounts
Money market accounts have higher interest rates than traditional savings accounts but much lower rates than CDs. However, they allow you to withdraw funds when needed, make regular deposits and write checks. By contrast, a two-year CD offers a higher APY at a fixed rate but does not allow you to add deposits or withdraw money early.
Investing accounts
Opening an investment account with a brokerage is another option for your money. Investing in stocks and bonds can provide significantly higher returns than a two-year CD but also carries some risk.
If you choose to open an investing account, make sure to fully diversify your portfolio to reduce risk. You’ll need to research stocks before you invest and keep current with market trends. Investing accounts typically come with brokerage fees, so you’ll need to be prepared for that.