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Choosing Between a CD and High-Yield Savings

Eric Rosenberg • November 10, 2023

When you’re putting cash away for the future, a certificate of deposit (CD) or a high-yield savings account could be a financially beneficial choice. CD accounts are time-bound deposit accounts where funds are locked away for a period of time, while high-yield savings allow you to withdraw your money at any time.

Certificates of deposit and high-yield savings accounts typically offer interest rates above other bank accounts and come with similar strong protections. Here’s a closer look at how CD and high-yield savings work so you can make the best savings decisions for your money.

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CD vs high-yield savings: Pros and cons

A CD or high-yield savings could be a smart choice, depending on your financial goals. Knowing the pros and cons of a savings account vs. CD account can help guide your decision to put your money in the best account for your current circumstances.

Pros of high-yield savings accounts

  • Flexible withdrawals with some limitations: With a high-yield savings account, you can withdraw as much as you’d like up to your account balance at any time during your bank’s business hours. The only major limitation is a restriction to six monthly withdrawals imposed by Federal Reserve regulations.1 That includes transfers from your savings to your checking account. Again, you can withdraw as much as you’d like with each transaction, but if you try to take out funds more than six times in a month, you could run into added fees. Read the account terms and conditions for any account you’re considering.
  • Competitive interest rates, similar to CDs: High-yield savings have some of the best interest rates for savings accounts. After all, “high-yield” is part of the account’s name. With savings accounts, a high yield is better for banking customers, as they earn more for every dollar saved. Along with money market accounts, high-yield savings accounts usually pay far more interest than a typical savings account from a traditional bank.

Cons of high-yield savings accounts

  • Generally, lower yields than top-performing CDs: If you want the best interest rate, you may still find a better deal with CDs (more on that below). Because you can withdraw anytime, banks tend to pay a little less for savings accounts than CDs.
  • Annual percentage yield (APY) can decreaseAPY tells you how much interest you’ll earn from your savings account. APYs can change at any time, including moving to a lower rate where you earn less every month. Rates tend to follow market interest rate changes, but financial institutions can raise or lower rates independently.
  • Convenient withdrawals may lead to unnecessary spending: A vacation, new shoes, the latest video game system, and other temptations could have you dipping into savings if you don’t have the willpower to resist. It’s best to add to your savings regularly for your long-term financial health. But regular withdrawals can lead to a cash crunch or buyer’s remorse.

Pros of certificates of deposit (CDs)

  • Typically offer higher interest rates than regular savings accounts: CD accounts can often get you the best interest rate available when comparing savings accounts at a bank or credit union. In exchange for locking away funds for a specific number of months or years, financial institutions tend to reward customers with higher interest rates.
  • Fixed interest rate for the entire CD term, which is advantageous during rate declines: Even if market rates decline, your CD interest rate won’t change. Interest rates are locked in for the duration of the CD, which can help you lock in above-market rates in an environment where rates are declining. If you believe market rates are trending downward, a CD is a standout option for long-term savings.
  • Early withdrawal penalties can discourage impulsive spending: Unlike a savings account, you can’t withdraw from a CD anytime. If you want funds before the maturity date, you’ll likely pay a fee in the form of several months of interest. Unless you need the cash, early withdrawal penalties can encourage you to leave funds where they are, earning interest in the bank.

Cons of certificates of deposit (CDs)

  • Can’t make additional contributions to the account: You can make additional deposits in a high-yield savings account at any time, including recurring deposits every week, month, or payday. You usually can’t make additional deposits when you open a CD account.
  • A fixed interest rate may result in missed opportunities during rising interest rate periods: As interest rates are locked when rates fall, they’re also locked when rates rise. In a rising interest rate environment, you could lock in a rate that becomes unfavorable when market rates rise. If you think the Federal Reserve is likely to increase rates, you may want to consider a high-yield savings account instead.
  • Penalty for early withdrawal in emergencies: CDs may be an excellent choice when you know you won’t need the funds until after the CD matures. But if you run into a financial emergency where you need money right away, you could be forced to pay an early withdrawal penalty to gain access to your funds. This disadvantage makes high-yield savings a better choice for emergency funds.

Are you confused about any of these terms? Check out our guide to common banking terms.

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How to choose between a CD vs high yield savings account

Now you know more about the pros and cons of CD vs. high-yield savings accounts, here’s a closer look at the differences between a CD and a savings account. Either can be the right choice in some situations, and you may even want to utilize both accounts to make the most of your money.

A CD account is the better choice if you’re sure you won’t need the funds for a period of time and believe market interest rates will stay the same or decrease. If you’re shopping for accounts and encounter a high-yield CD, you may want to know, what is a high-yield CD? A high-yield CD is any CD with an above-average interest rate.

A high-yield savings account is likely better for your needs when you may need the cash sooner or think interest rates could increase. When comparing CD rates vs. savings accounts, you may find CD rates are a little higher. But if you’ll have to pay a penalty to get your funds out early, slightly higher CD rates vs. savings account rates are not worth the risk.

In both cases, your funds are secure. In the U.S., CDs and high-yield savings accounts are insured by the FDIC. Your funds are secure up to $250,000 per depositor per financial institution, guaranteed to be returned even if the bank goes out of business.²

Are CDs or high-yield savings account better?

You may want to know which is best when comparing CDs vs. high-yield savings. In reality, they’re both helpful for long-term savings.

CDs are best when you know you won’t need your money for a specific length of time and believe you can lock in a rate that could beat the market. Otherwise, a high-yield savings account could be better for your current needs.

For more options, check out the top compound interest accounts.

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1 Information from Regulation D Reserve Requirements as of November 8, 2023:

2 Information from the Federal Deposit Insurance Corporation's FAQ page as November 2, 2023:

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