High-Yield CDs

High-yield CDs are a savings product that earns more interest than a traditional certificate of deposit (CD). They might also have other features like flexible terms, no fees or a higher minimum deposit. High-yield CDs can be a good option for savers who don’t mind losing access to cash in the short term.

Jennifer Schell headshot
  • Written By
    Jennifer Schell

    Jennifer Schell

    Financial Writer

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

    Read More
  • Edited By
    Savannah Pittle
    Savannah Pittle, senior financial editor for Annuity.org

    Savannah Pittle

    Senior Financial Editor

    Savannah Pittle is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

    Read More
  • Financially Reviewed By
    Thomas J. Brock, CFA®, CPA
    headshot of Thomas J. Brock, CFA, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

    Read More
  • Updated: September 12, 2023
  • 5 min read time
  • This page features 2 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Why Trust Annuity.org
Why You Can Trust Annuity.org
Content created by Annuity.org and sponsored by our affiliates.

Annuity.org has been providing consumers with the tools and knowledge needed to confidently make financial decisions since 2013.

We accept limited advertising on our site to help fund our work, including the use of affiliate links. We may earn a commission when you click on the links at no additional cost to you.

The content and tools created by Annuity.org adhere to strict editorial guidelines to ensure quality and transparency.

Key Takeaways

  • High-yield CDs earn a higher interest rate than a regular certificate of deposit, usually at least 1% higher than the average.
  • Besides the higher APY, high-yield CDs might have flexible terms, a higher minimum deposit or steeper penalties for early withdrawals.
  • A high-yield CD could be beneficial for someone looking for a safe way to grow their savings beyond what they can get from a savings account.

What Are High-Yield CDs?

High-yield certificates of deposit (CDs) are bank products that consumers can purchase to grow their savings. A high-yield CD holds a fixed amount of money for a period of time, during which the money in the CD earns interest at a fixed rate.

High-yield CDs earn interest at a higher rate than traditional CDs. Like high-yield savings accounts, high-yield CDs are typically offered by online banks. These institutions save money by not having physical locations, so they can offer better interest rates on CDs and savings accounts than traditional banks might.

A high-yield CD can make sense for someone that has some excess cash and would like to earn some incremental yield on it in a very low-risk way. It doesn’t make sense for someone with uncertain liquidity needs.

How High-Yield CDs Work

High-yield CDs work the same as a traditional CD. The CD will have a term, which is how long your money must be held in the account before you can withdraw it without penalty. There will also be an interest rate associated with the CD. This rate, expressed as the annual percentage yield (APY), tells you how much money your CD will earn during each year of its term.

Like other CDs, the interest rate on a high-yield CD is compounding. For example, if your CD compounds monthly, then at the end of each month the interest the CD has earned will be added to the balance of the account. The interest earned for the next month will be calculated using the total balance of the account including the interest. In short, compounding interest means that your interest can earn you even more money as your CD term continues.

Most CDs have a minimum required deposit to open the account, usually around a few thousand dollars. You may be able to open the account without the required deposit, but you’ll have to fund the account within a few days for it to remain open.

“The minimum deposits for many high-yield CDs are $5,000 or less and some don’t even have a minimum,” said John Halkins, senior investment advisor at Retirement Expert.

High-yield CDs can have a term anywhere from a few months to several years. When the term ends, your CD matures. Many banks set CDs up to renew automatically upon maturity, so your money will be locked up in another CD with the same term as soon as the current term ends. The interest rate for the new term may be different if the bank’s rates have changed since you started the first CD.

If you opt out of the automatic renewal, the bank will return your initial deposit along with any interest your CD earned during its term.

High-Yield CDs vs. Traditional CDs

The biggest difference between high-yield CDs and traditional CDs is the interest rate. According to Halkins, the APY required to be considered a “high yield” CD changes over time, as the Federal Reserve adjusts rates and both banks and credit unions follow suit. As of January 2023, Halkins said that “anything above 3% would be classified as a high-yield CD.”

Besides the difference in interest rates, high-yield CDs might differ from a typical CD in other ways. Certified Financial Education Instructor James Allen told Annuity.org, “In addition to the higher interest rate, high-yield CDs may also offer other perks, such as flexible terms and no fees.”

The required minimum deposit for a high-yield CD might be higher than that of a regular CD, said Andrew Lokenauth, founder of Fluent in Finance. Additionally, Lokenauth said that high-yield CDs may have longer maturity terms and might charge greater penalties for withdrawing funds from the CD before maturity.

Pros and Cons of High-Yield CDs

High-yield CDs can be an excellent tool to help offset the effects of inflation on your cash savings. But these bank products come with some drawbacks.

To decide whether a high-yield CD would benefit your personal financial situation, consider the pros and cons. Many of the benefits and drawbacks of high-yield CDs are the same as those of traditional CDs.

Pros and Cons of High-Yield CDs

Pros

  • Higher interest rate than traditional CDs
  • Safe vehicle for growing savings — no market exposure
  • May have perks like a flexible term or no fees

Cons

  • Money is locked away — can’t withdraw without penalty
  • Early withdrawal penalties may be higher than traditional CDs
  • Required minimum deposit might be higher

Is a High-Yield CD Right for You?

High-yield CDs are very safe and offer a greater return on your investment than simply holding the cash in a savings account. A high-yield CD could be beneficial for those who want to protect their savings from being eroded by inflation but don’t want the risk of exposing their cash savings to the fluctuations of the equity market.

According to Allen, “Consumers who are looking for a safe place to invest their money and who don’t mind tying up their funds for a set period of time may find that a high-yield CD is a good fit for them.” He especially recommends the product for savers who are nearing retirement.

Additionally, the varying term lengths of high-yield CDs make them potentially beneficial for consumers who are saving for a short-term goal. “High-yield CDs may be most suitable for individuals who have short-term savings goals, such as saving for a down payment on a house, or for those who are looking for a safe and secure way to invest their money,” said Lokenauth.

If you do decide to purchase a high-yield CD, Lokenauth advises shopping around and comparing CD offers from different banks or credit unions, “as different institutions may have different interest rates, terms and conditions, penalties or fees for early withdrawal.”

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 12, 2023