Which of the Following Is True When Comparing Savings Accounts and CDs?

Choosing between a savings account and a certificate of deposit (CD) depends on your financial goals and how soon you need access to your money. Both are secure places to store funds, but they function differently in terms of interest rates, liquidity, and restrictions.

Interest Rate Patterns

Savings accounts have variable interest rates, meaning banks adjust them based on economic conditions and Federal Reserve policy. When rates rise, savings yields increase, but they also drop when the Fed lowers rates.

CDs offer fixed interest rates for the duration of the term. If you open a five-year CD at 4.5% APY, that rate stays the same regardless of market changes. This stability is useful when rates are expected to decline, but it also means missing out on higher returns if rates rise.

Longer-term CDs generally offer higher yields. A six-month CD might have a 3.2% APY, while a five-year CD could offer 4.8%. Some banks provide promotional rates for specific terms, making it worthwhile to compare options.

Access to Funds

Savings accounts allow ongoing access to funds through online transfers, ATM withdrawals, and, in some cases, check-writing. Some banks impose transaction limits, such as the six-withdrawal-per-month rule under federal Regulation D, though enforcement has become more flexible.

CDs require funds to remain untouched for a set period. Withdrawing early usually results in penalties. Some banks offer no-penalty CDs, which allow early access without fees but typically come with lower interest rates. A laddering strategy—opening multiple CDs with staggered maturity dates—can help balance liquidity needs while benefiting from higher fixed rates.

Early Withdrawal Penalties

Withdrawing from a CD before maturity incurs penalties, which vary by institution and term length. These penalties are usually based on the interest earned, though in some cases, they can reduce the original deposit.

For short-term CDs, penalties often amount to a few months’ worth of interest. Longer-term CDs carry steeper charges, sometimes requiring forfeiture of six months to a year of interest. Some banks use a tiered penalty system, where longer terms result in higher penalties. If a withdrawal occurs soon after opening the CD, there may not be enough accrued interest to cover the penalty, leading to a reduction in principal.

Minimum Balance Requirements

Savings accounts often have tiered balance thresholds, where higher balances unlock better interest rates or waive monthly fees. A bank may require a $300 minimum daily balance to avoid a $5 monthly charge, while a premium account might demand $10,000 for a higher APY. Some online banks eliminate minimum balance requirements.

CDs typically require higher minimum deposits than savings accounts. A standard CD may require at least $500 or $1,000 to open, while jumbo CDs, which offer higher fixed rates, often mandate deposits of $100,000 or more. Minimum deposit requirements vary widely between banks and credit unions, with some offering low or no minimum deposit CDs to attract customers.

Insurance Coverage

Both savings accounts and CDs are federally insured, protecting depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC) covers bank deposits, while the National Credit Union Administration (NCUA) insures credit union accounts. The standard insurance limit is $250,000 per depositor, per institution, and per ownership category.

For deposits exceeding $250,000, spreading funds across multiple banks ensures full coverage. Using different ownership categories—such as individual, joint, and trust accounts—can also extend coverage within the same bank. Some financial institutions participate in programs like the IntraFi Network’s Certificate of Deposit Account Registry Service (CDARS), which distributes large deposits across multiple banks while maintaining FDIC insurance.