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CD vs. Savings Account: Which One Should You Choose?

  • Certificates of deposit require you to deposit money and leave it in the account for a fixed amount of time.
  • Savings accounts allow you to withdraw money whenever you need it.
  • To get the best rates, it’s important to compare several banks before opening an account.
  • You may reach your financial goals faster if you pair a CD with a savings account.
  • Certificates of deposit come in eight varieties, giving you plenty of flexibility.

Saving money is one of the best ways to plan for a rainy day. Even if you can’t put away thousands of dollars per month, you can still give yourself a bit of a financial cushion.

Certificates of deposit (CDs) and savings accounts are some of the most accessible savings options for consumers at all income levels, but there are some important differences you need to know about.

To take the guesswork out of saving money, we’ve done an in-depth CD vs. savings account comparison.

In this guide, you’ll learn:

  • How CDs work
  • How savings accounts work
  • Pros and cons of CDs and savings accounts
  • Which type of account you should choose

What is a CD?

A certificate of deposit is a type of savings account. Like traditional savings accounts, CDs are insured for up to $250,000 by the Federal Deposit Insurance Corporation or the National Credit Union Administration. The FDIC insures accounts at banks, while the NCUA insures accounts at credit unions.

When you deposit money in a CD, you usually agree to leave it there for a specific amount of time. For example, if you open up a three-month CD, you typically need to leave the funds alone for three months. Otherwise, you’ll have to pay a penalty for the early withdrawal.

The purpose of opening a CD is to earn interest on the amount deposited. This type of savings account is best for consumers who can afford to deposit their money and leave it alone for several months or years. It may not be right for you if you think you’ll need quick access to your savings.

How do CDs work?

When comparing certificate of deposit vs. savings account features, it’s important to know which type of account you’re reviewing.

Banks and credit unions offer up to eight types of CDs, all of which work a little differently:

CD rates vary based on the term you select. Currently, the national average ranges from 0.23% for a one-month CD to 1.43% for a 60-month CD according to the FDIC, with the highest rates offered on 6-month and one-year CDs. Multiple financial institutions offer high APYs on their CDs, giving you more bang for your buck.

For example, CDs with 5% APY or more include:

Rates change regularly, so these APYs may be higher or lower depending on when you attempt to open a CD. Some credit unions also offer accounts with rates of up to 6% on CDs. However, you will need to qualify under the credit union’s requirements to receive these rates.

Our top picks for cd rates

What is a savings account?

A savings account is a type of deposit account for money you don’t need right away.

With a savings account, the goal is to accumulate as much as you can without making a withdrawal. For example, if you save $50 per week for one year, you’ll end up with $2,600. You can use that money to pay for a vacation, make home repairs or purchase a more reliable vehicle.

It’s also wise to keep some savings on hand for financial emergencies, such as calling a plumber after a pipe cracked and flooded your kitchen. Depositing money in a savings account is a good idea if you don’t need the money immediately. Otherwise, you may benefit more from a checking account.

How do savings accounts work?

Savings accounts are even simpler than CDs. Once you open an account, you deposit money as often as you’d like. For example, if you have $100 left after paying your monthly bills, you can deposit that $100 in your account.

How you deposit your funds depends on which bank you choose. If you use an online-only bank, you may have to transfer money from a checking account into your savings account. If you use a brick-and-mortar bank, you may have additional options, such as filling out a deposit slip and handing cash to a teller.

If you want to withdraw funds, you have to use an ATM card, fill out a withdrawal slip or transfer the funds to a different account. Previously, federal law prohibited banks from allowing customers to make more than six withdrawals per month without a penalty.

However, the Federal Reserve Board lifted the limit early in the COVID-19 pandemic to make funds more accessible to Americans experiencing financial hardships. As a result, you can now make more than six withdrawals per month without incurring a penalty.

Money market accounts

Your bank or credit union may offer something called a money market account. This type of account usually comes with a debit card or with check-writing privileges, making your money more accessible.

When comparing a money market account vs. CD account, the most important thing to know is that money market accounts work pretty much the same way as standard savings accounts.

High-yield savings account

A high-yield savings account, commonly called a HYSA, offers a much higher APY than a traditional savings account. In fact, it’s not unusual to see HYSA rates that are more than 10 times higher than the national average APY.

For example, high-yield savings accounts with APYs of 4% or more include:

Pros and cons: CD vs. savings account

If you’re wondering whether to choose a CD or savings account, you need to understand the pros and cons of each savings option.

The table below highlights the advantages and disadvantages of CDs and savings accounts:

Account type Pros Cons
CD ✅Higher interest rates than standard savings accounts
✅Insured by the FDIC or the NCUA
✅Fixed interest rate
❌Penalty for early withdrawals
❌No ability to add funds unless you choose an add-on CD
❌Minimum deposit requirements
Savings account ✅No early withdrawal penalty
✅Ability to make deposits any time you’d like
✅Insured by the FDIC or the NCUA
✅Low minimum deposit requirements at many banks
❌Variable interest rates
❌Fees charged by some banks
❌Low earning potential on standard accounts

Similarities between CDs and savings accounts

When comparing a standard or high-yield savings account vs. CD options, it’s helpful to understand the similarities between certificates of deposit and savings accounts.

Let’s take a look:

Differences between CDs and savings accounts

The main differences between CDs and savings accounts relate to access and earnings.

Here’s what you need to know:

How to open a CD or savings account

The process of opening a CD is similar to the process of opening a savings account.

Follow these steps to open an account of your choosing:

1

Shop around.

Look for an account with the highest rates and most favorable terms.

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2

Fill out the application.

Be prepared to provide your name, contact information and other personal details. Banks and credit unions need this information to comply with federal banking regulations. If you go into a bank branch, make sure you have your driver’s license or another form of government ID with you.

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3

Fund your account.

Your financial institution may require a minimum deposit, but it’s possible to open a savings account even if you don’t have cash available.

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CD vs. savings account: Which is right for you?

If you need quick access to your money, a savings account is the best bet, as you can withdraw funds at any time. In contrast, CDs usually come with early withdrawal penalties.

CDs are a better fit for financially stable individuals who can afford to put money aside long enough to avoid the penalty for early withdrawals. A CD may also be right for you if you’re interested in a higher APY.

How to find the best CD

Here are some tips to help you find the best CD:

How to find the best savings account

To find the best savings account:

FAQ: CD vs. savings account

Is it better to put money in a CD or a savings account?

If you need to access money with little notice, a savings account is your best bet. A CD is better if you’re in a strong financial position and won’t need to access the money in your account before the CD term ends.

Should you have both a CD and a savings account?

There’s no reason you can’t have both types of accounts. A standard savings account gives you more access to your money, while a CD typically helps you earn more interest. You can pair these accounts to achieve your financial goals faster.

What's the difference between a CD and a high-yield savings account?

A high-yield savings account is a standard savings account with a higher-than-average interest rate. HYSAs usually work exactly like traditional savings accounts, which means you can withdraw funds as needed. In contrast, a CD requires you to set money aside for a fixed amount of time.

Which savings account will earn the most interest?

It depends on which type of account you choose. A high-yield savings account comes with a much higher APY than a standard savings account. However, not all financial institutions offer the same rates on their savings products. You can usually get the best rate by shopping around. You may also have more luck with an online bank versus a traditional brick-and-mortar bank.

Are CDs and savings accounts taxable?

Yes, you have to pay taxes on CDs as well as savings accounts as interest earned on these accounts is treated as ordinary income by the IRS.

About the Author

Leigh Morgan
Leigh Morgan Personal Finance

Leigh Morgan is a seasoned personal finance contributor with over 15 years of experience writing on a diverse range of professional legal and financial topics. She specializes in subjects like navigating the complexities of insurance, savings, zero-based budgeting and emergency fund development.

In the last five years, she’s authored over 300 articles for credit unions, digital banks, and financial professionals. Morgan is also the author of “77 Tips for Preventing Elder Financial Abuse,” a book focused on helping caregivers protect the elderly from financial scams.

In addition to her writing skills, she brings real-world financial acumen thanks to her previous experience managing rental properties as part of a $34 million real estate portfolio.

About the Reviewer

Blake Esken
Blake Esken Los Angeles Times

Blake Esken has over 15 years of experience in product management and has been a member of the Los Angeles Times staff for over five years.

As part of his role at the Los Angeles Times Commerce Team, Blake acts as the in-house reviewer and fact checker for LA Times Compare. He supervises all content for compliance and accuracy and puts to use skills he has honed through years of experience managing high-stakes projects for a range of industry-leading companies.

He has a strong background in data analysis, compliance, and communication, which allows him to support LA Times Compare through fact-checking in an effort to provide up-to-date and factual information across our content.

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