Should I put my tax refund into a CD this year?
You’ve worked hard, filed your tax return, and now you can reap the rewards. My refund check arrived in good order. You just need to find the best place to place it. If you want to save that money for the future, you have a few options.
Certificate of deposit (CD) is one of them. However, it may not be suitable for everyone. Here’s how to decide if it’s the right choice for you this year.
How do CDs work?
A CD is a type of savings account offered by many banks and credit unions. They tend to offer high annual percentage yields (APY), sometimes much higher than what you’ll find in high-yield savings accounts. And as long as you have the CDs, they are locked. However, the downside to these high rates is the lack of accessibility.
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When you open a CD, you agree not to touch the money in the account for a certain period of time, called the CD term. Depending on the CD you choose, this may take months or even years. If you withdraw your money early, you’ll typically pay a penalty equivalent to several months of interest lost.
Are CDs the right place for your tax refund?
Considering the limitations on CDs, they may not be a good option for a refund if you plan to use that money in the coming months. We recommend using a high-yield savings account. This account doesn’t guarantee your APY, but it does give you free access to cash whenever you need it.
That said, CDs may not be a bad option for people who don’t need to use their refund anytime soon. Current CD rates are high, with some offering up to 5.00% APY. As of February 16, 2024, the average tax refund is $3,207. If you invested this in a one-year CD with an annual interest rate of 5.00%, you would earn over $3,367 over 12 months. And if you invest in a long-term CD, you could potentially get a lot more interest.
Which type of CD is best for you?
Short-term CDs tend to have terms of less than 12 months, while long-term CDs tend to have terms of a year or more. Long-term CDs typically offer higher interest rates. However, with recent high inflation rates, we find ourselves in a strange situation where short-term CDs offer the most competitive interest rates. If you only want to lock up your money for a little while, use this method.
However, many believe CD rates will begin to fall starting in 2024. When interest rates begin to fall, it is often considered a good time to invest in long-term CDs because you can secure a higher interest rate. This can potentially pay off in the long run, but you need to be comfortable leaving your money alone for the long term.
What you do with your tax refund is ultimately your choice, but it doesn’t hurt to crunch the numbers and see what a CD can offer. You can always go back to a high-yield savings account if you don’t think it’s a good fit.
This savings account is FDIC insured and can earn 11 times the bank’s earnings.
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