Many savers are turning to one-year certificates of deposit (CDs) right now, and for good reason. They often pay competitive yields on money that will be freed up again relatively soon — making one-year CDs a good place to earn interest on funds you’ll need for short-term financial goals.
In fact, it’s possible to find one-year CDs these days that are out-earning some high-yield savings accounts. Having access to your principal and the interest in just 12 months gives you the freedom to make a planned purchase or to reinvest the money at that time.
Not all CDs are created equal, however, and this is often most evident when it comes to the annual percentage yield (APY). Here we’ll look at three scenarios in which $25,000 is deposited in one-year CDs earning very different yields and how much money each would be worth upon maturity. For these example CDs, one earns the national average rate, another earns a highly competitive yield and another earns a rock-bottom rate typically paid by big brick-and-mortar banks.
| Type of 1-year CD | Typical APY | Interest on $25,000 after 1 year | Total value of CD with $25,000 opening deposit after 1 year |
|---|---|---|---|
| CDs that pay competitive rates | 5% | $1,250 | $26,250 |
| CDs that pay the national average | 1.68% | $420 | $25,420 |
| CDs from big brick-and-mortar banks | 0.03% | $7.50 | $25,007.50 |
National average 1-year CD rates
The national average APY earned on a one-year CD is currently 1.68 percent. Overall, this average has remained the same or increased since March 2022, according to Bankrate research.
If you deposited $25,000 into a one-year CD that earns an APY of 1.68 percent, it would earn around $420 in total interest, making your CD worth a grand total of around $25,420 upon maturity. This is shown in the following breakdown:
Type of account: 1-year CD
Opening deposit: $25,000
APY: 1.68%
Total interest after 1 year: around $420
Total value of CD after 1 year: around $25,420
You can use Bankrate’s CD calculator to determine how much a CD will be worth at maturity. Just enter the CD’s term, the APY and your deposit amount.
Competitive 1-year CD rates
You can earn nearly three times the national average APY by going with a CD that pays a highly competitive rate. For instance, depositing $25,000 into a one-year CD that earns a 5 percent APY will leave you with a grand total of around $26,250 when the CD matures. This includes around $1,250 in interest and is broken down as follows:
Type of account: 1-year CD
Opening deposit: $25,000
APY: 5%
Total interest after 1 year: around $1,250
Total value of CD after 1 year: around $26,250
Choosing a one-year CD that earns 5 percent will earn you around $830 more in total interest than going with a CD that earns the national average of just 1.68 percent.
The best CD rates are often found at online banks, which don’t have the overhead expenses of maintaining branches and may pass the savings on to customers. What’s more, these banks may offer highly competitive rates in order to draw customers from larger banks.
1-year CD rates from big banks
Large brick-and-mortar banks typically don’t offer high rates on their CDs and savings accounts. For example, standard CDs of any term currently earn just 0.01 percent APY and 0.03 percent APY at Chase and Bank of America, respectively. A one-year standard CD at U.S. Bank currently earns a rate of just 0.05 percent.
Depositing $25,000 in a one-year CD that earns a yield of 0.03 percent will earn you only around $7.50 in interest by the time the CD matures.
Type of account: 1-year CD
Opening deposit: $25,000
APY: 0.03%
Total interest after 1 year: around $7.50
Total value of CD after 1 year: around $25,007.50
Who should get a 1-year CD?
A one-year CD can be a good option for anyone who prefers a guaranteed rate of return and won’t need access to their funds in less than one year’s time. For example, if you plan to purchase a car or put a down payment on a house in a year, a one-year CD could be a safe place to earn some interest on your funds. What’s more, you’ll be able to calculate just how much the CD will be worth at maturity since most CDs have a fixed rate.
Before locking your funds into a CD, it’s important to be sure you won’t need access to the money before the CD’s term is up. Otherwise, you’ll likely be subjected to an early withdrawal penalty, in which case you lose some interest and possibly even some of your principal. For this reason, a liquid savings account is often a better place to set aside funds for emergencies or other expenses you may encounter in the coming weeks or months.
Pros and cons of 1-year CDs
Pros
- A CD’s guaranteed rate means you’ll be able to calculate just how much it will be worth, including principal and interest, when it matures.
- A one-year CD doesn’t tie up your money too long (CDs often come in terms of up to five years or more), so you’ll have access to your money relatively soon to reinvest it or make planned purchases.
- Your money is protected by Federal Deposit Insurance Corp. (FDIC) insurance, as long as it’s at an FDIC-insured bank and within FDIC limits and guidelines.
Cons
- If you need access to your funds in a one-year CD in less than a year’s time, you’ll be subjected to an early withdrawal penalty.
- It’s possible to earn a better return by investing your money elsewhere (although you could end up losing money in certain other investments that don’t have fixed returns).
Bottom line
The benefits of a one-year CD can be significant for savers who find one that earns a highly competitive APY and who don’t need access to the funds for at least 12 months. It’s worth your while to shop around for the best rate. Finding a high-yield CD means you’ll receive a much higher payout when it matures than if you were to choose a CD paying the national average yield or a CD from a bank that pays rock-bottom rates.
