The pros and cons of CD investing

Certificates of deposit (CDs) are an attractive option if you’re looking to add some safety and predictability to your portfolio. CDs guarantee a fixed rate of return and don’t come with the same kinds of risks as other investments. But they’re not without their potential downsides, so it’s important to consider the pros and cons of CDs before committing your funds to them.

Summary: CD investing pros and cons

Pros

• CDs have consistent returns.
• CDs are safe investments.
• CDs often have higher yields than other savings accounts.
• CDs can help you organize your short and long-term goals.

Cons

• You give up access to your funds for the length of the CD.
• You will likely have to pay a penalty for withdrawing your funds early.
• You’ll get lower returns compared to high-risk investments.
• You risk losing purchasing power to inflation.
• You risk yields going up while you’re locked in to a lower rate.

Pros of CD investing

1. Fixed, predictable returns

Unlike other types of deposit accounts or investments, you can count on fixed-rate CDs to deliver a specific annual percentage yield (APY) for a specific time.

Even if interest rates fall precipitously in the broader economy, a fixed-rate CD, opened at a time when rates are high, will provide the same high APY for the full term of the CD. That guaranteed rate of return makes it easy to do the math and calculate how much interest you could earn in a CD, which can be helpful when you’re planning possible uses for the money.

2. Safety

CDs from federally insured banks and credit unions are backed by the full faith and credit of the U.S. government, up to $250,000 per depositor, per insured bank/credit union, per ownership category. Banks are insured by the Federal Deposit Insurance Corp. (FDIC) and credit unions by the National Credit Union Share (NCUA) Insurance Fund.

According to the Federal Deposit Insurance Corporation (FDIC), the independent government agency that protects funds deposited in banks, no one has ever lost a single cent invested in the CDs it backs. Even if a financial institution is forced to close its doors, your money is safe up to the insured limit.

3. Better yields than savings deposits

Because CD account holders can’t take their money back at a moment’s notice like savings account holders can (at least, not without paying a penalty), CDs are more valuable to banks than savings deposits. Banks sometimes pay CD investors a higher yield in exchange for locking up their money for a set term.

Right now, the best one-year CD pay about as much as the best high-yield savings account, so locking in a competitive rate with a CD could be beneficial if you don’t want to worry about potential APY drops in a savings account.

4. Wide selection of terms and CD types

CDs come in a wide range of terms and yields from thousands of banks and credit unions. Terms typically range from three months to five years, though options can be as short as one month or as long as 10 years, giving investors flexibility to match their goals.

In addition to traditional fixed-rate CDs, some banks offer specialty CDs such as:

• No-penalty CDs (also known as liquid CDs): These CDs give you the option to withdraw the funds without incurring an early withdrawal penalty.
• Step-up CDs and bump-up CDs: These CDs allow for rate increases during their terms.
• Add-on CDs: These CDs allow you to make further deposits after opening the account.

Cons of CD investing

1. Early withdrawal penalty

One major drawback of a CD is that you can’t easily access your money if an unanticipated need arises without paying a penalty. The penalty will eat into your interest and may even result in the loss of principal. Before opening a CD, weigh the yield and how much you’ll earn against the potential penalty if you need that money early. This is where a CD ladder can come in handy if you want to benefit from guaranteed rates but wish to free up some of your funds relatively soon.

2. Locking in a rate could cost you

Interest rate risk: The “gamble” you take when investing in a fixed-rate CD is whether you’re investing at a good time. If APYs fall after you open a CD, you’ll be riding high with a great APY for years. If they go up, it means you’re losing out on earning higher rates. For this reason, it’s important to consider a forecast of where rates are headed before committing money to a CD. For 2026, CD rates are likely going to decline even further from their recent highs.

Inflation rate risk: Locking your money in fixed-rate CDs also carries the danger that your money could lose its purchasing power over time if your interest gains are overtaken by inflation. Right now, it’s not difficult to find a fixed-rate CD with an APY above the rate of inflation. However, if inflation were to increase over time, money locked in a CD that’s earning a rate lower than inflation would lose purchasing power. With that said, any money you have in other, liquid accounts would likely suffer the same fate as your CDs. 

3. Comparatively low returns when compared to higher-risk investments

Though the yields tied to CDs are often more favorable than they are for more liquid bank accounts, they’re lower than what you’ll get for higher-risk investments such as stocks and exchange traded funds (ETFs). As such, CDs aren’t great for long-term savings, such as retirement.

When is investing in a CD a good idea?

A federally insured, fixed-rate CD can be a good investment under the right circumstances, such as:

• When you’re seeking a low-risk option for earning a guaranteed rate of return
• When you can afford to part with the funds for the duration of the term, which includes already having an adequate emergency fund
• When a CD’s APY is outpacing the rate of inflation
• When rates on deposit accounts — such as savings accounts and new CDs — are likely to drop during the CD’s term
• When you want to put a barrier between you and the chunk of money you’ve already committed to a future purchase or goal

Should you get a CD in 2026?

Competitive CD rates have been in decline since 2024. However, they are still beating inflation and are on-par with what you can find with a high-yield savings account.

Rates of return on many competitive CDs tend to move with changes to the federal funds rate, and the Fed has lowered that rate six times in 2024 and 2025 combined. Locking in a fixed-rate now, however, could be beneficial as rates on new CDs may decrease further. 

The following graph shows how competitive one-year CDs have performed compared to the federal fund rate since 2020.

Bottom line

Factor in the pros and cons of CDs if you’re looking for a safe place to keep your money, and look at which institutions are offering the best CD rates.

Regardless of what’s happening in the U.S. economy, don’t be swayed by fear and anxiety when it comes to investing in CDs. Instead, consider your time horizon (how soon you’ll need the CD money) and your financial plans and goals before you determine whether a CD is right for you.