Certificates of deposit (CDs) offer you a fixed interest rate in exchange for locking your money up for a set term. The best CD rates today are paying up to and slightly above 5.20%. That's significantly higher than what CDs were paying two years ago, but slightly lower than the top-paying CDs from earlier this year.
With CD rates still high, you might be wondering if you should renew your CD contract at maturity. For those who want a fixed-income investment, it might make sense. But if you're on the fence, here are three reasons why I wouldn't renew a CD.
1. You might not get a better rate
If you locked into a CD last year at an incredible rate, you might struggle to find one that will beat it (or match it) when it comes time to renew.
CD rates have already started to decline. Even as we await the Federal Reserve's eventual decision to cut its federal funds rate, banks and credit unions have already dropped CD rates in anticipation of it. While you can still find high rates on today's best CDs, the window is slowly closing.
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American Express® High Yield Savings
APY 4.25% Rate info4.25% annual percentage yield as of July 28, 2024 Min. to earn $1 Open Account for American Express® High Yield Savings OnAmerican Express'sSecure Website. Member FDIC. | APY 4.25% Rate info4.25% annual percentage yield as of July 28, 2024 | Min. to earn $1 |
Western Alliance Bank High-Yield Savings Premier
APY 5.31% Rate info5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. Min. to earn $500 to open, $0.01 for max APY Open Account for Western Alliance Bank High-Yield Savings Premier OnWestern Alliance Bank'sSecure Website. Member FDIC. | APY 5.31% Rate info5.31% annual percentage yield (APY) is accurate as of 7/11/2024 and subject to change at the Bank’s discretion. Minimum deposit required to open an account is $500 and a minimum balance of $0.01 is required to earn the advertised APY. | Min. to earn $500 to open, $0.01 for max APY |
UFB Portfolio Savings Account
APY 5.15% Rate infoTo ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. Min. to earn $0 Open Account for UFB Portfolio Savings Account OnUFB'sSecure Website. Member FDIC. | APY 5.15% Rate infoTo ensure you keep getting the highest rate at UFB, you'll need to keep an eye on their rates. Occasionally, the bank launches new accounts with higher rates. Existing accounts need to contact the bank to request being moved to one of these new accounts. | Min. to earn $0 |
That said, it's worth looking at what's out there. CD rates aren't uniform: Even as rates decline, some banks will toss out an incredible deal to draw in depositors. For example, Nuvision Credit Union is offering a limited time 10-month CD with a 6.00% APY. The maximum deposit is $5,000 (minimum of $1,000), and it's one of the best rates currently available.
Depending on your contract, your CD provider may even offer you a higher yield to retain you. For instance, I currently have a Bread Savings CD with a 5.25% APY. As long as I have auto-renewal turned on, this CD will start earning 5.45% APY in its second year.
2. The stock market could make more financial sense
If you're investing for the long term, you're likely better off investing in the stock market than renewing your CD. Over the last 50 years, the stock market has averaged annual returns of roughly 10%. Even the best-paying CDs can only promise you a return of a little over 5% for a short term, like 12 months.
That said, investing in stocks can be risky. No one can guarantee you'll get 10% annually for the next 50 years. This is where CDs really shine. Unlike stocks, they can guarantee a fixed rate of return as long as you stay within the bounds of your contract. If you can't handle the ups and downs of the market, renewing your CDs could bring stability and peace of mind.
3. T-bills are more tax efficient
Treasury bills (T-bills) are issued by the U.S. Department of the Treasury and are backed by the U.S government up to any amount. Like CDs, T-bills have fixed interest rates and set terms. Their rates are almost as high as the top-paying CDs, but have been steadily declining this year. A recent auction of T-bills, for example, had the following rates.
| Term | Rate |
|---|---|
| 4 weeks | 5.27% |
| 8 weeks | 5.26% |
| 17 weeks | 5.14% |
| 26 weeks | 4.99% |
Data source: TreasuryDirect.
T-bills may have smaller rates, but they're more tax efficient. Unlike CDs, you don't have to pay state taxes on interest earned from T-bills. This would make T-bills more economical if you lived in a state with high income taxes, like California or New York. Since CDs do incur state taxes, you might pocket more interest from a T-bill, even if their rates are comparable.
To be sure, both T-bills and CD rates are declining, which leaves little time to lock into one before rates drop abysmally. I don't think that's a great reason to renew your CD, however, unless you also have a larger strategy in mind. As your CD's maturity date approaches, consider alternatives and ask yourself if it's worth locking your money up for another term.
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