You have $100,000 to invest and want a safe way to grow this hefty sum of cash. A certificate of deposit is an option, but how much can you potentially earn on your money if you go this route? Read on to learn more about how CDs work, what rates to expect, potential tax consequences, and how CDs stack up to the competition.
What is a CD?
A certificate of deposit (CD) is a type of savings account readily available through banks and credit unions. It offers a fixed, attractive annual percentage yield (APY) that’s above what you’d get with a traditional savings account. But you must agree to deposit funds and let them set for a predetermined period – typically between a few months and a few years.
In most instances, longer CD terms generally mean higher returns. Keep in mind, though, that withdrawing funds before the maturity date will likely result in early withdrawal penalties.
It’s also worth noting that funds held in CDs at banks that are members of the Federal Deposit Insurance Corporation (FDIC) are insured by up to $250,000. The same form of coverage applies if you choose a CD at a credit union that’s a member of the National Credit Union Administration (NCUA).
National Average CD Rates
Here’s a look at the national average for CD rates by term:
- 1-year CD: 1.72% APY
- 3-year CD: 1.40% APY
- 5-year CD: 1.41% APY
Keep in mind that opting for a CD at an online bank or taking advantage of a promotional offer could mean far greater returns – often 5.00% APY or slightly higher.
*Source: Bankrate
Factors Influencing CD Interest Earnings
The rate financial institutions offer on CDs is determined by the federal benchmark rate, market competition, treasury yield changes and the term you select.
Federal Benchmark Rates
Federal benchmark rates, set by the Federal Reserve, directly impact the interest rates offered on CDs.
When these rates rise, financial institutions often increase CD rates to attract more deposits. However, when the federal rates drop, CD rates typically decrease as banks and credit unions adjust their interest offerings.
Competition Among Financial Institutions
Financial institutions compete to attract customers. To do this, they often adjust their CD interest rates.
A highly competitive market may lead to better rates for consumers as institutions try to outbid each other. If one bank or credit union offers higher rates, others may follow suit to keep up with demand.
Treasury Yield Changes
Treasury yields, especially those of short-term government bonds, can indicate trends in CD rates.
As treasury yields rise, banks may boost CD rates to offer comparable returns on these secure investments. When treasury yields fall, CD interest rates might also decrease. Keeping an eye on these yields can give you insight into how CD rates could shift.
Term Length
The duration of a CD significantly affects the interest rate.
Generally, longer-term CDs offer higher rates since banks benefit from longer access to your funds. A 5-year CD typically has a higher rate compared to a 1-year CD. However, longer terms also mean locking in your funds, so evaluate how much time you’re comfortable committing to.
CD Earnings: Example Calculation for $100,000
Investing $100,000 in a Certificate of Deposit (CD) can earn you varying amounts of interest depending on the length of the CD and its Annual Percentage Yield (APY). Below are examples of how much interest your $100,000 investment could earn for different CD terms.
3-month CD Earnings
- APY: 4.90%
- Potential earnings: $1,203.11
6-month CD Earnings
- APY: 4.70%
- Potential earnings: $2,323.02
9-month CD Earnings
- APY: 4.40%
- Potential earnings: $3,282.17
1-year CD Earnings
- APY: 4.60%
- Potential earnings: $4,600.00
18-month CD Earnings
- APY: 4.65%
- Potential earnings: $7,055.47
2-year CD Earnings
- APY: 4.00%
- Potential earnings: $8,160.00
3-year CD Earnings
- APY: 4.20%
- Potential earnings: $13,136.61
5-year CD Earnings
- APY: 3.40%
- Potential earnings: $18,195.98
Comparison Table
| CD Term | APY | Potential Earnings |
| 3 months | 4.90% | $1,203.11 |
| 6 months | 4.70% | $2,323.02 |
| 9 months | 4.40% | $3,282.17 |
| 1 year | 4.60% | $4,600.00 |
| 18 months | 4.65% | $7,055.47 |
| 2 years | 4.00% | $8,160.00 |
| 3 years | 4.20% | $13,136.61 |
| 5 years | 3.40% | $18,195.98 |
Comparison with Different Interest-Earning Options
When considering how much interest $100,000 can earn in a year, different options vary significantly by risk and return.
Low-Risk Options
Savings accounts and high-yield savings accounts are popular. Regular savings accounts typically offer low interest rates, earning minimal interest on your deposit. By contrast, high-yield savings accounts can provide a higher interest rate, sometimes reaching around 4.50% or higher with online banks.
Money market accounts also pay interest, often slightly higher than standard savings accounts. These accounts might require higher minimum balances but provide easy access to your money. With low-risk options, your principal is safe, though returns are modest.
Moderate-Risk Options
Corporate bonds offer better returns than low-risk options, but they carry some risk, depending on the financial strength of the issuing company. Or you can look into an investment fund with a medley of stocks and bonds to diversify your portfolio and minimize the risk posed by market fluctuations.
Investment funds might invest in a mix of stocks and bonds, reducing the risk of investing solely in stocks. These funds aim to generate better returns over time, but they do experience fluctuations based on market conditions.
High-Risk Options
Stocks can yield significant returns, but you risk losing some or all of your investments if the market dips. That said, investing in a diverse stock portfolio can mitigate some risk, as it could spread potential losses across different sectors.
Are There Any Tax Implications?
The interest earned on CDs is subject to federal taxation. It is considered taxable income per the Internal Revenue Service (IRS) and must be reported on your federal income tax return in the year earned. You’ll typically receive a Form 1099-INT at the end of the tax year that discloses the information needed at tax time.
Check your state laws to determine if interest earnings are also taxable at the state level.
How to Find the Best CD Rates
Start by comparing rates from different banks and financial institutions. Many banks offer promotional rates, especially for new customers.
When shopping around, pay attention to the minimum deposit requirements, fees (if applicable) and early withdrawal penalties. These factors will help you find the best CD for your financial situation.
Other Factors You Should Consider
Inflation can impact the value of the interest earned. If the inflation rate is higher than your interest rate, the actual value of your earnings will decrease. So, the APY on the CD you choose should outpace inflation to preserve the purchasing power of your funds.
Liquidity is another factor to keep in mind. If you foresee the need to pull funds much sooner rather than later, opt for a CD with a shorter term. Even if the APY is lower, it beats incurring steep early withdrawal penalties.
Conclusion: Deciding If a CD is Right for You
CDs are a safe way to grow your money and earn an attractive, predictable return. They could be a good fit if you value safety over maximum earning potential and don’t need immediate access to your funds. But if you can’t meet the minimum deposit requirement or prioritize liquidity, you’ll want to explore other options.
