- Prior to 2022, purchasing a 5% CD was impossible, but in today’s elevated interest rate environment, they are readily available from top-tier issuers.
- The CD terms that offer a 5% APY currently span between six months and 18 months.
- CDs are most suitable for conservative investors that value guaranteed income, have adequate liquidity and can afford to lockup their cash, and are minimally concerned with long-range inflation risk.
- Comparative alternatives to CDs include fixed annuities, U.S. Treasury bills, money market funds, short-term Treasury mutual funds and high-yield savings accounts.
What Are 5% Certificates of Deposit?
A 5% rate on a certificate of deposit (CD) offers a guaranteed annual rate of return of 5%, assuming the money put into the account is kept in place for a specified amount of time — also known as the CD term.
How Do They Work?
A 5% CD can be structured for various lengths of time, but most have tenures of six months to 18 months in 2023. Minimum deposit requirements and maximum deposit limits also vary depending on the issuing financial institution.
Generally, the longer the CD term, the higher the interest rate offered, holding all else constant. Additionally, the greater the deposit amount, the higher the interest rate offered — again, holding all else constant.
Beyond the CD term and the deposit amount, the early withdrawal penalty is the prominent structural feature to consider. Essentially, if you withdraw money from a CD prior to maturity, you will be penalized. Usually, this means forfeiting a certain number of months of interest. However, in some rare situations, loss of principal is possible.
For illustrative purposes, consider the following example:
- You buy a $20,000 CD on July 1, 2023.
- The term is two years (maturity on July 1, 2025), with an APY of 5%.
- Interest is accrued throughout the CD term, but it is not paid until maturity.
- The early withdrawal penalty amounts to three months of interest, which equals $250 ($20,000 × 0.05 ÷ 12 × 3 = $250). However, you are not concerned with this, because you intend to hold the CD until maturity.
During the first year, you earn $1,000 of interest ($20,000 × 0.05 = $1,000).
Then, during the second year, you earn $1,050 of interest ($21,000 × 0.05 = $1,050). The increased amount of annual interest reflects the power of compounding – the ability to earn interest on previously accrued interest.
At maturity, you close your CD account and withdraw $22,050, which reflects cumulative interest income of $2,050.
How Common Are 5% CDs?
Prior to 2022, the idea of finding a 5% CD was as improbable as seeing a leprechaun running through your backyard, but the times have changed. While leprechauns remain elusive, 5% CDs are easy to find – largely due to the elevated interest rate environment and the U.S. Federal Reserve’s ongoing maneuvers to tighten the supply of money and blunt inflationary pressures.
Today, you can find an array of 5% CDs, particularly, those with maturity terms spanning from six months to 18 months. That said, not all institutions offer such lucrative yields. The most competitive issuers offer yields that are four to five times the national average for each term.
Current yields on CDs offer a good opportunity for investors looking to enhance the fixed income portion of their investment portfolio. Not only are the rates guaranteed but the amounts up to $250,000 are as well. Both of these factors provide greater security than comparable fixed income securities.
Who Is a 5% CD Best For?
The suitability of a 5% CD, or any CD, depends on the individual’s personal finance circumstances, investment goals and risk tolerance level. CDs can make a lot of sense for some individuals but are suboptimal for others.
That said, a 5% CD is usually most suitable for conservative investors that value guaranteed income, can afford to lockup their cash and are minimally concerned with long-range inflation risk.
This may seem straightforward, but assessing your risk profile can be challenging. As a result, it can be prudent to consult with a fiduciary financial advisor before investing in a CD or any other type of investment vehicle.
How To Choose the Right 5% CD for Your Specific Needs
If you think a 5% CD is sensible for you, some due diligence is advised. Firstly, you should make sure the issuing institution is federally insured. A properly structured CD is fully ensured up to $250,000 for an individual account and $500,000 for a joint account. The Federal Deposit Insurance Corporation (FDIC) insures CDs issued by banks, and the National Credit Union Administration (NCUA) insures CDs issued by credit unions.
Beyond the safety of insurance, you need to make sure you are comfortable with the contractual features of the CD, namely, the deposit amount, the term length and the early withdrawal penalty. Collectively, these features greatly influence the economic viability of your investment.
Who Offers 5% CDs?
There are many financial institutions that offer 5% CDs. However, as mentioned previously, there is a big disparity between the top-tier issuers and the rest of the pack. The most competitive issuers offer yields that are four to five times higher than the national average. Several of the institutions offering 5% and higher CDs in 2023 are listed below.
- CIBC Bank USA
- Offers a one-year CD with an APY of 5.27% ($1,000 minimum deposit); it also offers a nine-month CD with an APY of 5.11% ($1,000 minimum deposit)
- Limelight Bank
- A division of Capital Community Bank, offers a one-year CD with an APY of 5.25% ($1,000 minimum deposit)
- First Internet Bank of Indiana
- Offers a one-year CD with an APY of 5.22% ($1,000 minimum deposit); it also offers a six-month CD with an APY of 5.06% ($1,000 minimum deposit)
- Merrick Bank
- Offers a one-year CD with an APY of 5.20% ($25,000 minimum deposit)
- Popular Direct
- Offers a one-year CD with an APY of 5.30% ($10,000 minimum deposit)
Which Banks Offer 5% CDs?
What Factors Contribute to the Current High CD Rates?
The relatively high CD rate environment in 2023 is largely attributable to the U.S. Federal Reserve’s aggressive federal funds rate hiking actions implemented since early 2022. As the federal funds rate (the overnight lending rate for depository institutions) increases, CD rates usually rise. Conversely, as it declines, CD rates usually fall.
Moreover, the highest CD rates in the market are usually comparable to the federal funds rate, which sits at a target range of 5.00% to 5.25% as of June 2023.
There is nothing preventing a bank or credit union from issuing a CD offering a rate that significantly exceeds the federal funds rate, but it is not something to expect given the highly competitive nature of the banking industry.
Potential Alternatives to the 5% CD
A 5% CD is a safe way to generate some interest income. However, there are several attractive alternatives, all of which exhibit low-risk, stable-value profiles. Brief overviews of three options are outlined below.
- Fixed Annuities
- In exchange for an upfront cash payment, these low-risk insurance contracts provide you a guaranteed stream of income. The contracts can be customized with a variety of add-on features, known as riders. Check the latest annuity rates to find the best option for you.
- U.S. Treasury Bills
- These are short-term debt instruments backed by the full faith and credit of the U.S. government. Their terms span from one month to one year. Today, the most attractive tenures are the three-, four- and six-month Treasury bills, all of which offer a yield around 5.50%.
- High-Yield Savings Accounts
- These are liquid savings accounts offered by online banking institutions. They offer yields that far exceed traditional savings accounts and rival the best CD rates in the market. However, unlike CDs, the interest rates associated with high-yield saving accounts can change at any time.
Other Frequently Asked Questions About 5% CDs
Most CDs have maturity terms that range from 30 days to five years. While rare, some institutions issues longer-term CDs. A 10-year term is the most common ultra-long instrument.
The FDIC is a good place to start your search. Knowing the national averages of various terms can help you set reasonable expectations. Then, you can search for the best CD rates available in the market through reputable sources.
All interest generated from a CD is taxable as it accrues, regardless of whether it is distributed. For long-term, zero-coupon CDs, this means you will end up paying taxes for multiple years before receiving any of the cash.
Unless you specify otherwise, most issuers will automatically renew a matured CD at the prevailing interest rate, following a specified grace period. As a result, it is important to keep the CD maturity date on your radar. To redeem the funds, you need to provide formal notice to the issuing institution.