3 Top Tips for Maximizing CD Investment Returns

As the Federal Reserve has recently signaled its readiness to start reducing interest rates, many consumers are turning to certificates of deposit (CDs) as a way to lock in today's high rates for a longer time. It's not a bad strategy. Short-term CD rates have already started to decline, and there's no telling how much more they could fall if the Fed outlines a clearer path forward at their next meeting.

Of course, since CDs do impose penalties, you'll want to create a strategy to help you maximize your returns. With that in mind, let's look at three ways to harness today's best CD rates without your plan backfiring.

1. Get a no-penalty CD

No-penalty CDs give you the option to break your CD contract early without incurring penalties or fees. This can be a savvy option for those who don't have a lot of savings but want to lock in high rates while they still can.

Early withdrawal penalties on CDs can be severe. Often, the penalty is equal to a period of interest, whether you earned it or not. For example, a 12-month CD may have a withdrawal penalty equal to 90 days of interest. If you were to withdraw after 60 days, you would still pay 90 days of interest, thus resulting in a loss.

Traditionally, no-penalty CDs weren't worth the investment because their APYs were so low. But, with today's high rates, you can find many no-penalty CDs that are on par with those that impose a penalty. For a good example of this, check the financial platform Raisin, where the highest no-penalty CD is currently paying out at 5.40%. For comparison, the highest regular CD is paying out at 5.51% -- only slightly higher.

2. Build a CD ladder

No-penalty CDs do have a major weakness: Most have short terms, like five months, making them poor investments for those with longer time horizons. If you want the flexibility of a no-penalty CD, but you'd like to lock in today's high rates for longer, you might be better off building a CD ladder.

A CD ladder involves dividing your money into equal lump sums and investing them into CDs with staggered terms. For example, if you had $25,000 in savings, you could invest your money like this:

• $5,000 in a 3-month CD
• $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

This would be different then, say, investing $25,000 in a 2-year CD. Between the two scenarios, the interest you earn might be similar, but the 2-year CD would require you to wait 24 months before you could access money, while this specific CD ladder would ensure you're never more than six months away from withdrawing a portion of your savings. It gives you peace of mind, while also giving you a plan B should you encounter an unexpected expense.

3. Get a brokered CD

A brokered CD is a type of CD contract that's only available through a brokerage account. In this case, the broker isn't the CD issuer but rather buys them in bulk from CD providers, like banks, then sells them to its customers. A few examples of brokered CDs include:

• Fidelity
• Charles Schwab
• Vanguard
• Edward Jones

Brokered CDs don't usually allow early withdrawals, not even if you agree to pay a penalty. Instead, you must sell your CD on a secondary market, much like a stock or ETF. This involves finding a buyer who will take the CD off your hands.

Like other investments, this could result in a loss, especially if CD rates have increased since you purchased yours. But since rates appear as if they will decrease in the near future, buying one of today's top-paying CDs and selling it later could result in a significant gain. There's no guarantee that you'll make money, but if you have an appetite for risk, it's certainly an interesting strategy to try.