One-Year CD - Online Banks 2020
Certificates of Deposit (CDs) are offered by most banks in a variety of maturity dates.
The 1-year rates in the table above are listed in descending order based on Annual Percentage Yield (“APY”) which is the rate of return that you will earn, when adjusted for compounding, over a 12 month period, and the way in which banks are required by US banking regulations to advertise their CD rates.
A certificate of deposit represents a time commitment between a depositor (someone who has money to put in the bank) and a bank.
The depositor agrees to leave a specified amount of money in the bank for a set period of time.
The bank agrees to keep the money safe and to provide a fixed rate of return.
A 1-year CD has a very brief time commitment and can also generate a rate of return above the prevailing savings rate.
Therefore, many people use 1-year CDs to slightly augment their rates of return over savings with only slightly more risk than they would have if they were entirely in savings accounts and money market accounts.
FDIC Insurance
Provided the bank is FDIC-insured and the deposit amount is within FDIC limits, the principal is also secured by an agency of the United States federal
government against loss. Further information about FDIC
insurance is found in this article
and if you have specific questions about your own circumstances you should use the FDIC’s Electronic Deposit Insurance Estimator.
CD Risk
The principal of a CD is safe and insured as long as the deposit amount is FDIC limits.
Interest that accrues and is paid or deposited to the principal also is safe as long as the total balance remains within FDIC limits.
A CD however bears two significant risks:
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Liquidity risk
If you think you may need access to
your principal during the period of the time commitment for a major purchase or an unforeseen
expense, CDs are generally not a good place to store money. The terms of most CDs outline
the penalty that will be assessed in order to access your capital. This penalty is usually
assessed in terms of time periods. For example, a common penalty on a 1-year CD is 3 months,
although you should always check this carefully in the terms and conditions before opening
a CD as it could be longer. Banks and credit unions are not obliged to offer an early
withdrawal penalty, and may change or remove or even refuse to honor the early withdrawal
penalty in their paperwork. For further details, please read this
article.
BestCashCow never recommends a strategy involving the purchase of a CD when you have a high
likelihood that you will need your capital.
Inflation risk
Since CDs are considered a very safe investment when you stay within FDIC and NCUA-limits,
they often do not pay much over the anticipated rate of inflation, and can often pay under this rate.
Were interest rates to rise
(or the inflation rates to rise), the real or inflation -adjusted value of your CD can drop over time, especially when you factor
in the tax consequences of ownership of a CD. In the event of rates rising, you may be able to use the early withdrawal penalty
to get your principal but for the reasons mentioned above, BestCashCow does not recommend relying on such a strategy.
Be sure to think about how CDs fit into your overall portfolio objectives.
CD Laddering
An effective strategy used by many to bolster their savings strategy is to own CDs with various maturities.
In other words, a depositor with $400,000 and put $100,000 in a 3 month CD, $100,000 in a 6 month CD, $100,000 in a 9 month CD and $100,000 in a one-year CD, then your liquidity risk in highly diminished because you are always near maturity on one of your CDs.
(Note that no more than 2 of these CDs should be at the same bank in order to avoid exceeding FDIC limits).
The reality is that we are in a very low interest rate environment, and any CD with a maturity of less than 1 year is going to pay below, perhaps well below, the prevailing rates in the leading online savings accounts or at brick-and-mortar banks.
Therefore, the strategy outlined above would be largely absurd in the current environment.
A laddering strategy that would make more sense for the same depositor who might otherwise hold $400,000 in cash would be to put $100,000 in a one year CD every three months.
Liquidity risk in the same way is diminished as the depositor is never more than 3 months from maturity, yet the depositor is picking up some small improvement over the best savings rates than where all of his money to be in cash.
Laddering strategies can also involve longer term CDs, but one that involves terms as little as 1 year can improve on the savings rates with minimal impairment to your liquidity.
More information on CD laddering is available in this article.
How Interest is Paid
The method of distributing the interest earned on a CD varies by bank.
Some banks pay interest monthly, other semi-annually, and others at the maturity of the CD. In general, online banks pay the interest electronically either by adding it to the principal balance or with an ACH transfer back to the depositor's primary linked checking account.
Other online banks may pay via a check in the mail.
Interest Rate
Currently, the most competitive banks offer 1-year rates that are slightly above the top online savings and money market rates.
Depositors need to decide if they want the fixed rate of the CD or the flexibility of the savings account (savings accounts do not come with any term time requirements).
In a rising rate environment, it is generally better to keep money flexible and liquid and put it into either short term CDs or savings or money market accounts.
In a falling rate environment, it is generally better to lock the rate using a CD or some other fixed rate investment.
In a stable rate environment, you may be able to collect a small premium in exchange for your loss of liquidity.
Online banks generally offer CDs available to residents of any of the 50 states.
The CD must be opened online and funded either by online transfer or by mail.
FREQUENTLY ASKED QUESTIONS ON CERTIFICATES OF DEPOSIT
What are CD rates?
CD rates are the fix rate that the bank pays a depositor for entering a CD for the entire term of a CD.
They are expressed in annual percentage yield (“APY”) terms, so that they are standardized.
$100,000 invested in a one year CD at 1% will be worth $101,000 at maturity in exactly 1 year.
$100,000 invested in a two-year CD at 1.50% will be worth $101,500 in exactly 1 year and worth
$103,022.50 at maturity (assuming the interest is not paid out before maturity, but is added to
the principal). Please see BestCashCow’s Savings & CD Calculator to better
understand the magic of compounded interest over time.
Do CDs Pay Interest Monthly or Yearly?
When opening a CD, it is important to consider how interest is credited or paid. Interest can be credited to the CD monthly, quarterly or annually. For those CDs of one year or less, interest may be credited only at maturity.
When interest is paid, the CD holder may have arranged for the interest to be mailed to them as a check. The other option is for the interest to be added to the principal of the CD.
Regardless of how and when interest is paid, it is required to be expressed (standardized) by all banks in the form of an annual percentage yield (“APY”) rate.
How Is Interest on CDs Taxed?
Interest on CDs is taxed as ordinary income. Your bank will provide you with a 1099-INT detailing the interest that you must report on your tax return at the end of each year. Regardless of whether interest is paid in the form of a check or added to principal, CD holders need to report the interest in the year in which it is paid. Purchasing a Certificate of Deposit of one-year or less that pays a single lump sum interest payment at maturity may defer tax on interest until the following year, but otherwise holders of CDs should generally expect to pay ordinary taxes on interest earned in every year in which they hold a CD. Further detail is found in IRS Publication 550 (page 5).
Why Are CD Rates So Low?
CD rates on terms of 1 and 2 years were very constantly low for many years from 2009 to 2015 as the Fed Funds
rate was held at zero following the great recession. Rates on longer term CDs were occasionally more interesting
during this period (depending more heavily on the level and direction of the US Treasury Bond).
The US Federal Reserve’s action towards normalizing interest rates has been painfully
slow (resulting from Brexit, European financial instability, etc.), and CD rates have remained
at levels that are very low by historical norms. However, we have seen CD rates rise in 2016
and 2017 as the Federal Reserve has begun to slowly raise the Fed Funds rate.
Are CD rates going up or down? When are they expected to rise?
If the Federal Reserve accelerates its plan to raise the Fed Funds rate or if global economic
developments were to cause US treasury rates to rise, we would quickly see higher CD rates.
However, the global economic environment is uncertain with European long-term interest rates being
negative. Should the US also enter a recession and the US 10-year Treasury rate fall still further,
it is possible that CD rates could fall further.
What is a good rate for a CD?
BestCashCow lists the best CD rates available from online banks above, and the best rates from
local
banks and credit unions. A good rate is the best rate that you can find at an
FDIC or NCUA-insured institution, provided that it compensates you adequately over the
best savings rates for the liquidity that you are giving up. Only you can determine based
on your own personal circumstances whether that is a good CD rate for you.
BestCashCow’s Savings & CD Calculator can help you to understand how much more
interest a CD can generate over a savings account.
Is there an advantage to a 12-Month Certificate of Deposit over Online Savings Accounts?
At any moment in time, there is ordinarily a premium to an online 12-month CD rate over an online savings
rate. The table below demonstrates the spread between the two over the last several years.
Whether it makes sense for you to take advantage of these higher rates in the 12-month rate depends on
your own need for liquidity and your view on whether and how fast savings rates will rise.
ADVANTAGES AND DISADVANTAGES
The advantages of online one-year CDs are:
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Funds deposited in FDIC banks and within insurance limits are protected by the full faith and credit of the United States government.
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CDs provide a predictable, set rate of return.
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The CD can be opened from the comfort of your house.
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The CDs are generally available to any resident of the United States.
The disadvantages of one year CDs are:
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One year CDs pay interest rates that are just above the leading rates offered on online and branch-based savings and money market accounts. There is a very slight premium for having the money locked up for one year. Your own circumstances and tax rate will help you to determine if that premium provides adequate compensation to you for your loss of liquidity.
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The deposited money is committed for one year.
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The account must be opened online and all inquiries must be conducted online or via the phone.
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Depending on the bank, the opening and funding process can take several days to weeks although the bank generally locks the rate once the application has been received and approved.
All banks listed on BestCashCow are FDIC insured; BestCashCow.com strongly recommends that you stay within FDIC insurance limits and that if you are unsure of how the limits affect you, please visit the FDIC website.
To understand all of the income generating options available to a saver, please view the Income Generating Investments Comparison Chart.
