Here's What Happens When You Switch From a Savings Account to CDs

Right now is a great time to open a certificate of deposit (CD). The best CD rates are topping 5% APY, and you might be considering switching your savings from a savings account to a CD instead. This can certainly be a good move for some of your cash -- but perhaps not all of it. Let's take a closer look at what you can expect if you abandon your savings account and go all-in on CDs.

You get to lock in your rate...

The biggest benefit to moving money from a savings account to a CD is that the rate on your account won't fluctuate. Instead, it'll be fixed for the duration of your CD's term, be it six months, one year, or even five years. This makes CDs a good investment in a high-interest-rate environment that is predicted to change, much like we're in now.

The Federal Reserve hiked the federal funds rate a whopping 11 times in an attempt to bring down the soaring inflation we experienced in the wake of COVID-19. These rate hikes seemed to have had an effect, as the rate of inflation for January 2024 was 3.1% -- down 6 percentage points from 9.1% in June 2022.

But consequently, many experts believe that rate cuts are on the horizon for later in 2024. When this happens, we can also expect rates on savings accounts and CDs to fall. The rates on consumer bank accounts are not directly linked to the federal funds rate, but the two tend to move in concert.

Locking in a rate on a CD is a great way to earn a guaranteed return on your money, and if you can leave your money alone for the duration of the CD's term, you'll know exactly how much money you'll end up with. Say you put $10,000 into a 1-year CD with an APY of 5.00%. At the end of that year, you can look forward to having earned $250 -- just for leaving your money alone. But what if you need that cash before the term is up?

...but you have less access to your money

The biggest drawback to moving money from a savings account to a CD is that you'll have to leave it in place for the duration of the CD's term. If you need to break into your CD early, you'll incur penalties like forfeiting some of the interest you would have earned.

These penalties vary depending on the bank that holds your CD, but let's say the early withdrawal penalty on your $10,000 1-year CD amounts to six months of interest. That comes out to $125 (half of the $250 you would have earned). But if you need to access your money before six months have gone by, you wouldn't have even earned that $125 yet and would be facing the loss of some of your $10,000 principal.

This lack of flexibility is why you should think long and hard before locking your money up in a CD. If you've got a pot of money earmarked for a future use with a set timeline (say, a home purchase in 18 months), a CD might be a great place for it. The money will grow at a fixed rate, and it'll be safe from both bank failure (via FDIC insurance) and also potentially you dipping into it for other expenses.

Might you regret locking all your money in a CD?

If you have money that has no set use or timeline (like your emergency fund, which should always be at the ready and accessible), you might regret putting it into a CD. A savings account (or even a money market account) is a much better place for this money.

And if you're still actively saving, an account that lets you continually add money is also a better idea. Once your CD is open and funded, you won't be able to deposit more cash into it. But savings and money market accounts can accept deposits anytime.

CDs have some advantages over savings accounts -- the ability to lock in a high rate is a big one. But don't assume that you won't still need a savings account even if you open a CD or two.