What happens to my CD if the stock market crashes?
Instead, it's in a financial institution, like a bank or credit union. So, in the event of a market crash, your CD account will not be impacted or lose value.
Yes, CDs are generally still safe even if a stock market crash occurs. CDs are a type of bank account. Many accounts offer a set rate of return for a specific timeframe that won't fluctuate.
CDs are typically regarded as secure investments, although you can indeed lose money under certain circ*mstances. If, for example, you decide to withdraw from a CD prior to its maturity date, you'll likely be hit with an early withdrawal penalty.
Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.
As rates drop, banks can also cut back on the interest they pay to savers. So you'll typically see lower rates for deposit accounts, including savings accounts, CD accounts and money market accounts, during a recession.
So, should you open a CD now or wait? It could very well be the time to buy, especially since the Fed has indicated it will likely stop raising rates and start cutting them in 2024. Although many investors had anticipated a rate cut in March, Fed Chair Jerome Powell recently suggested that a cut was unlikely that soon.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
A few local credit unions have CDs paying 6% APY or more. To open a 6% APY CD, you may need to meet certain eligibility requirements. There are also banks and credit unions with CDs paying over 5% APY, which are available nationwide.
The best CD rates start around a very attractive 5% and go up. But the recent regional banking turmoil may have you concerned about your investment in case of a bank failure. CDs are treated by the FDIC like other bank accounts and will be insured up to $250,000 if the bank is a member of the agency.
Bottom Line. CDs can be a safe way to earn a little interest on your savings over a set period of time. But don't put more money in CDs than you can afford to lose access to for the length of the CD's term. Once your money is in a CD, you generally can't touch it without penalty until it matures.
How do I avoid tax on CD interest?
There's no getting around paying tax on the interest, unless the CD is purchased in a tax-advantaged account, such as an individual retirement account (IRA) or a 401(k) plan. In this case, the same rules of tax deferral that apply to an IRA are applied to the CD.
Use Multiple CDs to Manage Interest Rates
Multiple CDs can help you capitalize on interest rate changes if you believe CD rates will change over time. You might put some cash into a higher-rate 6-month CD and the remainder into a 24-month bump-up CD that allows you to take advantage of CD rate increases over time.
Like all fixed income securities, CD prices are particularly susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market.
Two credit unions pay over 7% APY on accounts right now: Landmark Credit Union and OnPath Rewards High-Yield Checking. However, these are both checking accounts with limitations on eligible balances. Plenty of high-yield savings accounts pay over 5% APY on your total balance without making you jump through hoops.
The national average rate for one-year CD rates will be at 1.15 percent APY by the end of 2024, McBride forecasts, while predicting top-yielding one-year CDs to pay a significantly higher rate of 4.25 percent APY at that time.
Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.
By putting $5,000 into a 6-month CD, you can allocate a portion of your funds to a low-risk, interest-bearing asset. This complements riskier investments in stocks, real estate or other ventures, creating a balanced portfolio that can help mitigate potential losses in more volatile investments.
The bottom line. Overall, long-term CDs could be a good investment for those who want to lock in guaranteed returns at a relatively high rate in early 2024. But as the year progresses, if interest rates fall as expected, then long-term CDs could lose some of their appeal.
CD interest is subject to ordinary income tax, like other money that you earn. The IRS requires investors to pay taxes on CD interest income. The bank or financial institution that holds the CD is required to send you a Form 1099-INT by January 31.
Generally, money kept in a bank account is safe—even during a recession. However, depending on factors such as your balance amount and the type of account, your money might not be completely protected. For instance, Silicon Valley Bank likely had billions of dollars in uninsured deposits at the time of its collapse.
What not to buy during a recession?
During an economic downturn, it's crucial to control your spending. Try to avoid taking on new debt you don't need, like a house or car. Look critically at smaller expenses, too — there's no reason to keep paying for things you don't use.
What Are the Biggest Risks to Avoid During a Recession? Many types of financial risks are heightened in a recession. This means that you're better off avoiding some risks that you might take in better economic times—such as co-signing a loan, taking out an adjustable-rate mortgage (ARM), or taking on new debt.
- T Bank – 5.50% APY.
- Financial Resources Federal Credit Union – 5.43% APY.
- My eBanc – 5.41% APY.
- ConnectOne Bank – 5.40% APY.
- Apple Federal Credit Union – 5.40% APY.
- CFG Bank – 5.40% APY.
- USAlliance Financial – 5.40% APY.
- Alliant Credit Union – 5.40% APY.
The Financial Partners Credit Union 8-Month Certificate Special pays the highest CD rate overall. You can earn 6.50% APY on an 8-month CD if you meet certain requirements.
| Top Nationwide Rate (APY) | Total Earnings | |
|---|---|---|
| 1 year | 6.18% | $ 618 |
| 18 months | 5.80% | $ 887 |
| 2 year | 5.60% | $ 1,151 |
| 3 year | 5.50% | $ 1,742 |
