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Planning to receive a significant tax refund this year? You’re certainly not in the minority. In fact, the average tax refund currently sits at $3,300, reflecting a 4.8% increase compared to the previous season.
So, what are your plans for this windfall? One enjoyable option is to indulge a little—perhaps treat yourself to a delightful vacation or invest in a home improvement project that you’ve been eager to tackle.
On the other hand, consider strategies that benefit your future self. Have you thought about using a certificate of deposit (CD) to make your tax refund grow? If not, it might be worth exploring.
Understanding CDs as a Smart Investment
A certificate of deposit serves as a secure method to accumulate interest on your tax refund. By opening a CD, you lock in a fixed interest rate that guarantees your return over the term of the deposit.
Even if the Federal Reserve decides to lower interest rates later, your fixed rate remains unchanged, providing stability. CDs also offer various term lengths, typically ranging from three months to five years, allowing you to select one that aligns with your financial objectives.
For those interested, utilizing resources from financial sites like Bankrate can help you find competitive CD rates.
Comparing CDs and High-Yield Savings Accounts
The primary distinction between CDs and high-yield savings accounts is liquidity. With high-yield savings accounts, you have the flexibility to withdraw funds whenever needed. In contrast, funds in a CD are not accessible until the term expires. If you withdraw early, banks often impose a penalty that can negate any accrued interest.
A no-penalty CD might be a wise alternative, as it allows for partial withdrawals without facing heavy fines.
Additionally, while high-yield savings accounts typically feature variable interest rates, locking in a CD before any potential interest rate cuts by the Federal Reserve can secure your earnings at a higher rate throughout the duration of the term.
Top CDs to Consider for Your Tax Refund
Here are five short-term CDs that can help maximize your tax refund:
These options are noteworthy due to their favorable rates and shorter terms, which strike a balance between effective earnings and access to your money.
Estimating Earnings from a CD
The amount your tax refund can earn in a CD will vary based on the refund amount and the specific CD selected. For instance, if you receive the average tax refund of $3,300, you might find the following scenarios helpful.
The longer you commit your money to a CD, generally, the higher your earnings will be. However, you should be comfortable with the possibility of not having access to those funds for extended periods. If that idea isn’t appealing but you still desire better returns, consider shorter-term CDs that can automatically renew upon maturity.
Are CDs the Right Choice for You?
CDs are particularly advantageous if you have sufficient funds that can remain untouched for the loan duration. However, if liquidity is a concern, you may want to consider other options.
Two alternatives include:
Money Market Account: A money market account offers interest rates similar to CDs and high-yield savings accounts while providing check-writing privileges and debit card access, making it easier to manage sudden financial needs.
High-Yield Savings Account: While this account option allows for quick access to cash, it does not offer check-writing privileges. However, withdrawing funds through ATMs or electronic transfers is straightforward.
Final Thoughts
With tax refunds up slightly compared to last year, those expecting one should contemplate options to grow that amount. Certificates of deposit can offer a risk-free opportunity to earn additional income, potentially yielding a few extra hundred dollars depending on the terms chosen.
Just bear in mind that CDs are most beneficial when funds are allowed to mature, as early withdrawals may diminish any interest accrued.
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