I Am Just Not Too Excited About a 1-Year CD at 2.85% APY

There are several well-known online banks that are offering 1-Year CDs at 2.85%. In fact, some banks may even be a little higher. You can see the list of the best online 1-year CD rates here. You may also find better one-year CD rates offered by local banks near you or credit unions near you.

BestCashCow, of course, provides the most comprehensive list of CD rates in the US. At various points, I have highlighted what I believe to be great one-year rates.

I, however, have not been particularly eager to recommend that people get heavily into one-year CDs at 2.85% and that has caught many of BestCashCow’s readers by surprise and been the source of a lot of queries that I have received.

Here are the reasons why I would be hesitant to jump in heavily:

First, the Federal Reserve is still raising rates, most recently moving the Fed Funds rate to a range of 2.25% to 2.50%. The Fed has also most recently guided towards a neutral rate of 2.80%. But, they also said that there are 2 more moves in 2019 and one in 2020 and that would take the Fed Funds rate to 3.00% to 3.25% in a little over a year.

Second, I see a risk of real inflation in 2019 and into 2020 as I outlined at the end of this article. If that happens, we are looking at higher rates and a Fed that will raising faster and higher.

Third, savings rates are pretty high and getting more so. Even if I believe that they aren’t going higher, they really are unlikely to go lower over the next twelve months. I count no fewer than ten nationally available online savings offerings at 2.25% and many more available at banks locally and at credit unions. $100,000 deposited in any of those places paying 2.25% is going to deliver no more than $600 less than a one-year CD (and that $600 difference is fully taxable). The savings account could also wind up delivering roughly the same amount or even more than a one-year CD if savings rates continue on their upward trajectory.

Fourth, you are locking your money up and even though 1-year is a short period of time, it is still locked up. In return for that extra fully taxable $600 (or less) on $100,000, you are locking your money up into 2020. If you need your principal back, Sallie Mae or Live Oak Bank are going to charge you three months’ interest (other online banks, such as Marcus or Purepoint will actually charge you more to break a one-year CD). A three-month’s interest penalty on $100,000 at 2.85% is $712.50.

If you have money that you don't need for a year, you can always put some of it into 1-year CDs. However, if you think that there is even a remote chance that you will need the money back or that rates could go much higher, then the risk-reward of the 1-year CD just is not very exciting. I’d stay primarily in online savings accounts.