If you’ve taken a look at deposit interest rates lately, you’ll notice a trend over the past two years that simply cannot be broken. It seems that each week, a litany of banks continue to lower the interest rate offered on savings, money market and CD accounts and while it would appear they can’t go any lower… they do.
The longest certificate of deposit term offered by most banks is five years and this term also offers the best interest rate. While the average interest rate on a top online savings account is ~1.50% APY, a 5-year CD can offer almost double in return. Five years is certainly a long time to tuck your money away but there’s no telling how interest rates will continue to be low. Once you secure your interest rate, that is the rate you’ll receive for all five years of your investment.
Below you will find the best 5-year CD’s available from national, online banks. These rates change often but we always make sure to keep them accurate.
Synchrony— Synchrony leads the pack in terms of interest rate, offering a 1.65% APY on their 5-year CD product. To acquire that interest rate, you must make a deposit of at least $2,000. The penalty for withdrawing your funds early from a 5-year Synchrony CD is 365 days of simple interest.
- Best alternative product–The Synchrony 12-month CD offers a great 1.50% APY. That’s almost higher than any online savings account and higher than any 12-month online CD. It too has a $2,000 minimum deposit requirement.
Ally — Ally bank currently offers a 1.60% APY on all balances for their 5 year CD product. Ally does not have any minimum balance requirement and if you need to pull your funds out early, it will cost you 150 days of simple interest. That is the smallest penalty of any online bank, that I know of.
- Best alternative product–Ally offers an 11 month no penalty CD. If you have $25,000 to deposit, the APY is a strong 1.55%. This means that after six days of having the money deposited in your account, you can withdraw it, plus the interest completely fee free. A $5,000 minimum deposit yields an interest rate of 1.40% and less than $5,000 means an APY of 1.50%.
Discover— Discover currently offers an APY of 0.80% on their 5-year CD. The minimum amount to deposit when opening a new 5- year CD is $2,500. If you close your CD early, Discover charges a whopper of a penalty. 18 months simple interest will be removed from your balance on the five year CD.
- Best alternative product–Discover High Yield Savings Account and it’s 0.60% interest rate.
Every bank you see above is FDIC insured. This means that the money you invest is secure, up to $250,00. This means that you can invest up to $250,000 at each of the banks above, making millions of your money safe. However, investing money at different branches of the same bank does not increase your FDIC insurance limit. It’s also important to note that CD’s are labeled under the “single accounts” category so if you have an individual savings, money market and CD account, they all add up to the $250,000 limit.
Table of Contents:
Creating a 5-Year CD Ladder
There are two primary reasons people shy away from a 5-year CD term.
- What happens if interest rates go higher?
- What happens if you need money in an emergency?
Five years is a long time to tuck your money away at a 2.35% APY and a lot can happen in that time. For example, just in the last few years I’ve bought a house, got married, had two children etc. etc. Each of those times, I had liquid assets to assist paying for all of it. Had I put a lot of money away in a 5-year CD, I’m not sure I could have navigated those expenses.
The best way to mitigate these downsides is to create a CD ladder. The concept is quite simple actually; to sacrifice a small amount of interest, you can keep your funds much more liquid. For example, let’s assume you have $25,000 to invest in a 5-year CD at a 2.35% interest rate. Instead of plugging all $25,000 in at once, you decide to invest in five separate 5-year CD’s.
- Year one–$5,000 CD at 2.35% APY
- Year two–$5,000 CD at 2.45% APY
- Year three–$5,000 CD at 2.30% APY
- Year four–$5,000 CD at 2.20% APY
- Year five–$5,000 CD at 2.50% APY
It’s rare for a CD rate to stay static for five years, so I’ve created a little bit of fluctuation.
Losing Interest in a 5-Year CD
During the five years you’re investing in long term CD’s, you still maintain liquidity if you need it. What happens if your roof starts leaking in 24 months? Well, in the above scenario, you still have $15,000 available because you’ve only opened two 5-year CD’s at $5,000 a piece. After five years and your first CD matures, you’ll have ~$5,615 back in your hands. You can choose to once again open another 5-year CD, or simply keep the funds available.
However, creating a CD ladder means you’re sacrificing interest. Had you put the whole $25,000 into a 5-year CD term, the end result would be a mature CD and a balance of $$28,079. By laddering, after five years, you’ll only have generated ~$1,800 in interest and to earn the remaining ~$1,200, you’ll have to wait for your other four 5-year CD’s to mature. Keep in mind of that while you’re waiting to open a CD for your ladder, you can park your money in a high yield savings account. So while you won’t be earning the same interest you can on a 5-year CD, you will still be earning up to 1.40% APY.