Interest rates are important to people who put their money into savings accounts or rely on their investments for income. Twelve-month rates on certificates of deposit (CDs) were below 3% from 2008 to 2022, but have increased recently. When you factor in taxes and inflation, 12-month CDs have provided negative real returns in 17 out of the last 20 years. 

CDs are short-term investments that pay fixed principal and interest, are insured by the FDIC up to $250,000, and are subject to changing renewal rates and early withdrawal penalties. The chart uses the highest marginal federal income tax rate based on $100,000 of taxable income for a married couple filing jointly for each calendar year. The tax rate is not representative of the experience of every investor. A lower tax rate would have a favorable effect on the real return. 

Are CDs the Right Choice for You?

Although there are benefits to investing in CDs, there are also risks. Because of the inherent safety and short-term nature of CDs, the interest rate is usually lower than investments with higher risk. In addition, CDs sold prior to maturity may be subject to early withdrawal penalties. Investors should also consider the impact of inflation on CD returns. CD income in the illustration below is calculated using the 12-month annualized average monthly CD rate.¹

¹ CD rates are proxied by Bankrate’s 12-month CD national average.

² Tax Policy Center, 12/23.

Investing involves risk, including the possible loss of principal.