3 Smart Tips for Maximizing Your CD Returns Before Rates Start to Drop

Like baggy jeans and Barbie bubble gum pink, certificates of deposit (CD) made a trendy comeback in 2023. 

By now, the CD story is so old and worn out, most of us can recite it like it's Little Red Riding Hood: big, bad inflation made an appearance, the Federal Reserve hiked its borrowing rate to its highest level in 23 years, and rates on CDs got a mega lift in the process. And while the author of that story seems to have fallen asleep before writing the last pages, it does appear some closure is in sight. 

It's now estimated the Federal Reserve will make at least one rate cut before the end of 2024. Who's to say that's right or wrong -- I'm done trying to predict the economy -- but the laws of gravity are certainly coming into effect. What goes up must come down.

If you've been on the fence about opening your first CD in 2024, it's probably lonely up there. I'm willing to bet most ideal candidates for CDs have already made that decision. But if you're opening your first CD, or you're contemplating a second or third term with CDs that are set to expire, use these tips to maximize your returns. 

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1. Go for the long term 

Right now, the best CD rates are on shorter terms. That means CDs that mature within 12 months. But don't be fooled by the higher rates. If it's the maximum returns you're after, you might be better off with a long-term CD. 

To show you what I'm getting at, let's consider two CD options. The first is a 6-month CD with a 5.30% APY, the second a 5-year CD with a 4.30% APY. If you deposited $25,000 in the first CD today, you could earn more than $650 in interest at maturity. That's great, but now consider the second CD. With $25,000 invested in a 5-year CD until maturity, you could earn more than $7,360 in interest at a 4.30% APY. 

This 5-year CD with 4.30% APY exists at Quontic Bank, currently one of the top providers of long-term CDs. The minimum deposit is $500 and it offers five terms, ranging from six months to  five years. 

If you can keep your money invested for five years, this would be an invaluable opportunity to maximize your earnings. At this time, it's highly likely that short-term CDs will mature at a time when CD rates are starting to drop across the board. You could earn high interest now, but if you wanted to renew your CD term or pick another term, you might have to settle for a rate lower than today's. 

2. Avoid callables 

Callable CDs have a call option that allows the issuer to call or redeem the CD before its maturity date. If your CD is called, your money -- deposit plus interest up until that point -- will be returned to you or repackaged into another CD with a lower interest rate. 

A callable CD may have an attractively high interest rate upfront, but the call option makes them a bad deal right now. Although CD providers have to wait until the call date, which could be a few months from now, the fact that CD rates are destined to drop makes it all but certain that they will call it. If that happens, you would stand to gain less interest than if the same CD had reached maturity.   

3. Stagger CD terms with a ladder 

A CD ladder involves dividing your money into equal lump sums and investing them into CDs with staggered terms. This helps you avoid early withdrawal penalties on CDs with long terms. For example, $25,000 could be staggered into a ladder of five CDs, like so: 

• $5,000 in a 6-month CD
• $5,000 in a 1-year CD
• $5,000 in an 18-month CD
• $5,000 in a 2-year CD
• $5,000 in a 3-year CD

This would be different then, say, investing $25,000 in a 3-year CD, which would require you to wait 36 months before you could access your money. Meanwhile, this specific CD ladder would let you withdraw a portion of your savings every six months until the last term. It would give you peace of mind, while also giving you a plan B should you encounter an unexpected expense.

All told, maximizing CD rates boils down to seizing high APYs on the right selection of CDs while you still have a chance. The window is slowly closing, with industry-wide rate cuts already underway. If you're sure a CD is the right deposit account for you, now might be the time to act. Otherwise, this opportunity might become as passé as last year's trends.