What Is Better Than a CD for Savings?

Certificates of Deposit (CDs) are a common choice for saving money with a fixed interest rate over a set period. These accounts typically involve locking up funds for a specific term, from a few months to several years, in exchange for a predictable return. While CDs offer stability and guaranteed interest, they often come with penalties for early withdrawals, limiting access to funds if unexpected needs arise. This leads savers to seek alternative options that might provide greater flexibility, different interest rate structures, or potentially higher returns without strict liquidity constraints.

High-Yield Savings and Money Market Accounts

High-yield savings accounts (HYSAs) offer significantly higher interest rates than traditional savings accounts, allowing deposited funds to grow more quickly. These accounts maintain a variable interest rate that can fluctuate with market conditions but generally remains competitive. Funds held in HYSAs are readily accessible, providing high liquidity for depositors who may need to access their money without penalty. HYSAs are widely available from online banks and some traditional financial institutions.

Money market accounts (MMAs) share many similarities with HYSAs, also offering competitive, variable interest rates. MMAs are FDIC-insured up to the same $250,000 limit. A distinguishing feature of many MMAs is the inclusion of limited check-writing capabilities or debit card access, providing more transactional flexibility than a standard savings account. While MMAs offer some checking features, they are primarily savings vehicles, and the number of transactions may be subject to monthly limits.

Deposits in these accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per institution, for each account ownership category. This insurance covers both the principal and accrued interest, safeguarding against bank failure. Both account types provide a liquid environment for savings, allowing depositors to add or withdraw funds as needed, unlike the fixed terms of CDs. The interest earned on these accounts is generally taxable at both federal and state levels, depending on an individual’s tax situation.

Treasury Securities

Treasury securities are debt instruments issued by the U.S. government, considered among the safest investments available due to being backed by the full faith and credit of the United States. These securities are issued with various maturities and structures. Investors can purchase new issue Treasury securities directly from the government through the TreasuryDirect website, or they can buy existing securities through brokerage firms.

Treasury Bills (T-Bills)

T-Bills are short-term securities with maturities typically ranging from four weeks up to 52 weeks. Instead of paying periodic interest, T-Bills are sold at a discount from their face value, and the investor receives the full face value at maturity. The interest earned is the difference between the discounted purchase price and the face value received.

Treasury Notes (T-Notes)

T-Notes represent intermediate-term debt, with maturities ranging from two to 10 years. Unlike T-Bills, T-Notes pay a fixed interest rate every six months until their maturity date. This semi-annual interest payment provides a regular income stream to investors.

Treasury Bonds (T-Bonds)

T-Bonds are long-term debt instruments, typically issued with maturities of 20 or 30 years. Similar to T-Notes, T-Bonds pay a fixed interest rate semi-annually throughout their lifespan.

Interest income from all Treasury securities is subject to federal income tax but is exempt from state and local income taxes.

Series I Savings Bonds

Series I Savings Bonds, commonly known as I-Bonds, are a distinct type of savings bond issued by the U.S. Treasury designed to protect investors’ purchasing power from inflation. These bonds earn interest through a composite rate composed of two elements: a fixed rate and a variable inflation rate. The fixed rate is determined at the time of purchase and remains constant for the entire life of the bond. The variable inflation rate adjusts every six months based on changes in the Consumer Price Index for All Urban Consumers (CPI-U).

Interest on I-Bonds is compounded semi-annually, meaning that earned interest is added to the bond’s principal value every six months, and future interest calculations are based on this new, higher principal. Individuals can purchase I-Bonds directly from the TreasuryDirect website. There is an annual purchase limit of $10,000 in electronic I-Bonds per Social Security Number.

I-Bonds must be held for a minimum of one year before they can be redeemed. If an I-Bond is redeemed before five years from its issue date, a penalty is applied, resulting in the forfeiture of the last three months of interest earned. The interest earned on I-Bonds is subject to federal income tax, though this tax can be deferred until the bond is redeemed or matures. A significant tax advantage is that interest from I-Bonds is exempt from state and local income taxes. Additionally, the interest may be entirely tax-free at the federal level if the bond proceeds are used to pay for qualified higher education expenses.