When it comes to saving money, most people seek safe, low-risk investment options that offer reliable returns.
Two popular choices for such savings are Certificates of Deposit (CDs) and high-yield savings accounts (HYSA).
Let’s explore how high-yield savings accounts and CDs compare, the benefits of each, and how you can decide between them.
What are CDs and High-Yield Savings Accounts?
To understand the return potential of each, we first need to break down what each option offers:
- Certificates of Deposit (CDs): A CD is a time-bound deposit offered by banks and credit unions. When you invest in a CD, you agree to leave your money with the institution for a fixed term—typically ranging from 3 months to 5 years. In exchange, the bank offers you a guaranteed interest rate, which is often higher than that of traditional savings accounts. However, your money is locked in until the term ends, and early withdrawal usually results in penalties.
- High-Yield Savings Accounts (HYSAs): HYSAs are a type of deposit account that offers higher interest rates than regular savings accounts. Unlike CDs, HYSAs offer more flexibility, allowing you to deposit or withdraw funds at any time without penalty. The interest rate on these accounts fluctuates with market conditions but tends to be significantly higher than the national average.
Comparing Interest Rates: Which Offers the Best Return?
The interest rates you can earn on your deposit are a critical factor.
For instance, the national average for a traditional savings account is around 0.30% APY (Annual Percentage Yield).
However, both offer far higher returns.
- High-Yield Savings Accounts: HYSAs typically offer APYs ranging from 0.50% to 4.00% depending on the financial institution and market conditions. For example, as of 2025, some online banks offer rates up to 4.00% APY. These rates can change frequently, so shopping around for the best rate is essential.
- Certificates of Deposit (CDs): On the other hand, the interest rate on CDs is usually higher for longer terms. Current rates for best CD or high yield savings account options range from 1.50% to 5.00% APY for terms of one year or more. A 5-year CD, for example, could offer a guaranteed return of 5.00% APY, significantly outperforming the rate of most high-yield savings accounts.
Which One is Better for Returns?
CDs offer higher rates if you’re looking for a fixed, guaranteed return, especially on longer-term CDs.
However, HYSAs’ flexibility allows you to enjoy competitive rates that may be more attractive if you want easier access to your funds.
Accessibility and Flexibility: Liquidity Matters
One of the biggest differences between a high-yield savings account and CDs is accessibility.
If you need liquidity—that is, the ability to access your money quickly—HYSAs have a clear advantage.
- High-Yield Savings Accounts: You can access your funds at any time without incurring a penalty. This makes HYSAs a great option for emergency funds or savings that may need to be accessed on short notice.
- Certificates of Deposit (CDs): The major drawback of CDs is that your funds are locked up for the term. While you can withdraw your money early, doing so typically results in a penalty that reduces your principal or interest earned. This might not be an issue if you don’t mind locking your money away for a set period. However, for those who prefer flexibility, HYSAs are a better option.
When is Liquidity Important?
Liquidity is often mentioned when comparing CDs to high-yield savings accounts in Reddit discussions or personal finance blogs.
Many users emphasize that high-yield savings accounts are the better choice because they offer liquidity without penalties.
Risk Considerations: Safety of Your Funds
The Federal Deposit Insurance Corporation (FDIC) insures both options up to $250,000 per depositor, per bank.
So, your money is protected in case the bank or credit union fails.
- High-Yield Savings Accounts: Since these accounts are generally offered by well-established banks and credit unions, they are backed by the same FDIC insurance as regular savings accounts.
- Certificates of Deposit (CDs): Similarly, CDs are insured by the FDIC or NCUA (National Credit Union Administration) if you’re depositing with a federally insured institution.
Which One is Safer?
Both provide excellent protection for your funds.
Your savings will be safe in either account if you stay within the FDIC limits.
Tax Considerations: Understanding Interest Earnings
Another important factor when comparing is the taxation of your interest earnings. Both are subject to federal income tax.
- High-Yield Savings Accounts: Interest earned on a high-yield savings account is taxed as ordinary income, which means it is taxed at the same rate as your wages.
- Certificates of Deposit (CDs): Likewise, the interest earned from a CD is also taxed as ordinary income. Additionally, if you withdraw from a CD before the term is up, you may owe penalties and potentially higher taxes on the early withdrawal.
If you’re looking for tax-advantaged options, you may want to consider alternatives such as IRAs or other tax-deferred accounts.
How to Choose: Which Option is Right for You?
It’s important to weigh your financial goals, risk tolerance, and the time horizon for your savings.
Choose a CD if:
- You want a guaranteed return over a fixed term.
- You don’t need immediate access to your money.
- You can commit to a longer-term investment (e.g., 1 to 5 years).
- You’re willing to lock in a rate for a set period.
Choose a High-Yield Savings Account if:
- You want flexibility and easy access to your funds.
- You want to earn competitive interest without committing to a long-term deposit.
- You need an emergency fund or want to keep funds available for short-term goals.
- You’re comfortable with interest rates that fluctuate with the market.
Conclusion
Both CD investment and high-yield savings accounts offer attractive returns, but which one is best for you depends on your specific financial needs.
CDs may offer higher guaranteed returns, especially for longer terms, but high-yield savings accounts provide greater flexibility and liquidity.