CD vs. Savings Account: What's The Difference? | Chase (2024)

FAQs

CD vs. Savings Account: What's The Difference? | Chase? ›

A CD account typically requires a higher balance than savings accounts, and your funds will usually remain on deposit for a fixed period of time (the “term” of the account).

Savings accounts typically don't require you to keep your money in the account for a set period of time. But CDs typically require you to keep your funds in the account until the maturity date, which can range from a few months to 20 years.

Higher interest rate: Not only is the interest rate on a CD often higher than on other savings accounts, it is fixed and doesn't vary over the term like you see with money market and savings accounts.

Limited liquidity

One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.

For example, if you deposit $500 in a five-year CD that earns a 5.15% APY, your balance by the end of five years will be $642.71, earning you $142.71 in interest. However, if the interest rate is 3.25%, your earnings will only be $586.71, a difference of $56 in interest earnings.

Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

That said, here's how much you could expect to make by depositing $20,000 into a one-year CD now, broken down by four readily available interest rates (interest compounding annually): At 6.00%: $1,200 (for a total of $21,200 after one year) At 5.75%: $1,150 (for a total of $21,150 after one year)

Why might someone choose a savings account instead of a CD? ›

Deciding between CD or savings account

When to consider a savings account: You need the money to be accessible, like an emergency fund. You're saving for a smaller or relatively short-term goal. You're primarily putting money aside instead of trying to grow it.

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.

Money market accounts provide access to funds and offer interest rates similar to regular savings accounts. CDs earn more interest over time but have restricted access to funds until maturity. Money market accounts are a better option when you need to withdraw cash.

Are CDs safe if the market crashes? Putting your money in a CD doesn't involve putting your money in the stock market. Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.

Some CDs are penalty-free. You can get a better rate on short-term CDs than long-term CDs right now. It's actually possible to lose money on CDs.

Quick Answer

CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.

While a CD will typically have a higher interest rate than a savings account, and sometimes even money market accounts, it will also have a penalty for making a withdrawal before maturity.

CDs generally offer higher interest rates compared with money market accounts. Money market accounts provide access to funds and offer interest rates similar to regular savings accounts. CDs earn more interest over time but have restricted access to funds until maturity.

CDs are best for individuals looking for a guaranteed rate of return that's typically higher than a savings account.

Unlike term deposits which have a fixed interest rate, savings accounts generally have a variable interest rate, so will be dependent on market conditions. That means if interest rates go down you won't earn as much interest; of course, if interest rates do go up, you'll be able to benefit from getting a higher rate.