Is a 5-Year CD Right for You in 2024? 5 Smart Tips

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In the past 20 years, CDs have rarely exceeded 5% interest rates, according to data published by Forbes Advisor. CD rates briefly climbed up to 7% in 2023. Although you can’t find those offers in 2024, you can still find rates of 4% and above.

For instance, right now BMO Alto offers a 5-year CD with no minimum deposit requirements and APY. With such high interest rates available, it might be tempting to lock in that rate for five years, even if it means tying up your money until 2029. With all this in mind, is a 5-year CD your best investment choice right now? These are the pros and cons.

5 Reasons to Open a 5-Year CD Right Now

With CD rates close to their 20-year high, there are plenty of reasons a 5-year CD makes a solid, profitable investment right now.

1. Interest Rates Might Drop in 2024

At its most recent Federal Open Market Committee Meeting, the U.S. Federal Reserve forecasted that it would make three interest rate cuts in 2024 of one-quarter point each. Although they held interest rates steady at the first meeting, which took place January 30 – 31, 2024, they have seven additional opportunities to lower rates.

The first cuts could occur as early as Mar. 19-20, 2024, although the Fed is more likely to wait until later this year. January’s Consumer Price Index report showed inflation of 3.1% year-over-year, which was better than December’s 3.4% increase but not the forecasted 2.9% economists predicted.

If the Fed cuts rates any time this year, CD rates will drop within months of the rate cut, as well.

2. You Can Lock in a High Long-Term Rate

With Federal benchmark interest rate cuts on the horizon, whether that occurs in June of this year or not until December, interest rates on savings accounts, money market accounts and CDs are also likely to drop in 2024. If you wait to open a CD, you’ll likely not earn as much interest.

Similarly, if you open a one-year CD, you may not be able to roll over the funds into a new CD at the same high rate when it matures. A lot can happen in five years. It’s safe to say that interest rates will fluctuate over that time. But you’ll have your money locked in, accruing interest at 2024 rates.

3. If Interest Rates Drop, You Can Borrow Money Cheaply for an Emergency

People considering a longer term CD often have misgivings about tying up their funds for a long period of time. Over the next five years, you could lose your job. Want to plan a wedding, Snag a great deal on your dream vacation. Need a new car. Have a baby.

All of these events, happy or sad, may require an influx of cash. However, if the Fed drops interest rates as forecasted, you can borrow money at a lower rate while leaving your cash in a CD to accrue interest.

Even in a high interest rate environment, you can qualify for a credit card with a 0% APR if you have a high credit score. Of course, you should always keep some funds in an easy-to-access emergency savings account to avoid relying on your credit cards. Today’s best high-yield savings accounts offer interest rates as high as many CDs.

But if you have extra money lying around that you don’t expect to use and want to invest, a 5-year CD remains a solid choice.

4. You Won’t Be Tempted to Spend Your Money

For many people, keeping money in an easy-to-access savings account creates too much temptation to spend it. If this sounds like you, a 5-year CD could be the best solution.

5. Your Money Is Insured by the FDIC or NCUA

CDs are insured by the Federal Deposit Insurance Corporation, while credit union-issued certificates are similarly insured by the National Credit Union Administration. This means your money, up to $250,000 per accountholder across CDs at that financial institution, is federally insured.

The same can’t be said for stocks, cryptocurrency or some other investments.

3 Reasons Not To Open a 5-Year CD

Opening a 5-year CD is not for everyone. Consider these circumstances before you decide to tie up your money for five years.

1. You Will Pay Penalties for Early Withdrawal

If an emergency arises, or even a situation where you want to cash out your CD to take advantage of an investment opportunity, you’ll face early withdrawal penalties. The minimum penalty is seven days’ simple interest if you withdraw money within the first six days.

That may not sound bad. But the federal government doesn’t cap penalties at a maximum. And the longer the term of the CD, typically, the higher the early withdrawal penalty. Penalties could be 90 days worth of simple interest or as much as one year of interest.

If your penalties exceed the amount of interest accrued so far, your penalty could even reduce your initial deposit so you’ll lose money. If you are investing in a CD, be certain you won’t need the money until the CD matures.

2. If Interest Rates Fall, Stock Prices May Rise

If the Fed cuts interest rates, essentially injecting more money into the economy by making it easier and cheaper to borrow money, this could spark consumer spending. If that happens, the stock market may rise.

At that point, you may want to invest your funds in the stock market instead of having them locked up in a CD with less than 5% interest.

3. You Can Get an Equally High Rate with Shorter Terms

The general rule is that longer term CDs pay higher interest rates. But many banks today offer 3-month or 12-month CDs with equally high rates as an enticement to attract customers. For instance, Western Alliance Bank has a 3-month CD with a 5.41% APY right now.

Keep in mind, there is no guarantee you will be able to secure rates this high, again, once the CD matures. But if you aren’t comfortable keeping your money tied up for 5 years, you can still find high interest rates.

Where To Find the Best CD Rates for 5-Year CDs

If you open a CD at BMO Alto with just $1,000, you’ll earn $252.16 in interest by the time the CD matures, according to the bank’s interest calculator. BMO Alto is just one example out of many banks offering 5-year CDs with rates exceeding 4% right now.

Your choice might depend on a variety of factors, including who has the best CD rates for the term you want. Whenever you open a bank account of any type, you want to make sure to place your money with a reputable, FDIC-insured bank. Proximity of branches to your home or online banking options might also be important to you.

If you open a CD at the same bank where you already have a checking account, you might earn additional loyalty perks for maintaining a higher balance across your deposit accounts.

Final Note

Depending on your financial situation and the amount of money you have available to invest, a 5-year CD can be a good way to lock in today’s high interest rates in an uncertain economy.

Rates are subject to change; unless otherwise noted, rates are updated periodically. All other information on accounts is accurate as of Feb. 20, 2024.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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