Is a $5,000 CD deposit still worth it?
In the face of inflation and elevated borrowing costs, certificates of deposit (CD) accounts have been a smart way for savers to grow their funds — and protect them in a volatile economic climate. This was especially beneficial as inflation hit a decades-high in June 2022 and, later, when the Federal Reserve raised the federal funds rate to its highest level in 22 years. Since those events occurred, however, the economy has improved.
Inflation is now approaching the Fed's target 2% goal (it was 3.1% in the latest report) and speculation surrounding a cut to the federal funds rate is high for when it meets again in September. With these new considerations in mind, then, some savers may be wondering if a deposit into a CD account is still valuable.
While a $5,000 deposit into a high-rate account could have earned savers a significant return in recent years, that could soon be changing. Understanding this reality, then, it's beneficial to know the pros and cons of making a $5,000 CD deposit now. Below, we'll break down exactly what to know.
Start by seeing how much more money you could be earning with a top CD here now.
Is a $5,000 CD deposit still worth it?
Should you take $5,000 out of your savings and move into a CD today? Here are three reasons why it could be worth doing:
- High rates: Rates on CDs can be as high as 5.75% right now. Compared to the minimal 0.45% rate that traditional savings accounts come with currently, you're essentially losing money by not moving at least some of your money into one of these accounts.
- Rate cuts are coming: CD interest rates are largely affected by the federal funds rate. That rate has been high for much of the last year, but it could be cut in September, reducing what savers can earn with these accounts. So don't wait for that to happen.
- Rates are locked: Unlike high-yield savings and traditional savings accounts, the rates on CDs are locked and will remain the same throughout the account maturity. This is a major advantage now with rate cuts likely, and it allows savers to accurately determine exactly how much they'll make.
Don't wait for rates to fall. Lock in a high CD interest rate today.
When a $5,000 CD deposit may not be worth it
While the above reasons present a strong case for depositing $5,000 into a CD now, it may not be the right move for every saver. Here are three reasons why it may be worth skipping:
- You may be able to earn more somewhere else: If you invest $5,000 in a particular stock, for example, you may be able to earn significantly more than the 4%, 5% or 6% a CD account provides. That said, the CD return is reliable while stock market plays are notoriously volatile, so you'll need to weigh the pros and cons.
- You'll lose access to your money: CD rates only come in return for you leaving your money in the account untouched for the full term. If you need some or all of your $5,000 deposit, expect to pay an early withdrawal penalty to regain access. And in today's inflationary climate, you may need these funds sooner than later.
- You'll need to pay taxes on interest earned: While the interest earned on one of today's top CD rates could be substantial, you'll still need to pay taxes on the interest earned. So a $300 earning on a $5,000 deposit, for example, may not be as high as it appears once it comes time to file your 2024 tax return.
The bottom line
For many savers, a $5,000 deposit into a CD is still valuable right now. With elevated, locked interest rates currently available but the prospect for those rates to fall soon, many savers would benefit from depositing this amount now. That noted, you may be able to earn more interest with a more volatile investment — and you will lose access to the money in your CD until it's matured. And you'll have to report the interest earned on your taxes next year. So be sure to carefully weigh these concerns now, and if you're ready, act promptly to take advantage of today's high rates while they're still readily accessible.
