If you plan to receive a sizable tax refund this year, you’re not alone. The average tax refund is $3,300, an increase of 4.8% on average from last season.
So, what do you plan to do with it? One super fun option is to splurge. Whether that involves a nice vacation or doing a smaller home improvement project, that’s one route to take to treat yourself.
Alternatively, you can find a way to treat your future self. If you haven’t considered a certificate of deposit to grow your tax refund, you should.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
How CDs grow your tax refund
A certificate of deposit is a risk-free way to grow your tax refund. The reason for this is when you open one, you earn a guaranteed rate of return that won’t change throughout your term.
This means even if the Federal Reserve decides to cut interest rates in the future, it won’t impact you since CDs come with fixed interest rates. Another perk is CDs come with ample term choices, ranging from three months to 5 years. Therefore, you can choose a term that more aligns with your savings goals.
Using this tool from Bankrate, you can find some of the top-earning CD rates:
How do CDs differ from high-yield savings accounts?
The biggest difference is unlike high-yield savings accounts, where you can withdraw cash anytime you want, with a CD, your money is untouchable until the term matures. If you need to access the funds early, the bank or credit union will close the account and charge an early withdrawal penalty. This fee can wipe away any interest earnings.
One smart alternative to this is a no-penalty CD. With it, you’re allowed to withdrawal a portion of your account if you need it.
Another difference is high-yield savings accounts come with variable interest rates. Keep in mind there are some who think the Federal Reserve will cut interest rates up to two times this year. If this happens, all savings rates will likely drop.
That would impact savings accounts differently. If you lock in a CD before the next Fed meeting, you’re ensured to receive that same high rate throughout your term. You don’t receive the same safety net with a high-yield savings accounts.
The 5 best CDs for your tax refund
Here’s a look at five short-term CDs to grow your tax refund fast:
As you can see, each of these CDs offer an excellent rate of return. What’s more, each has shorter terms. That way, you achieve the goal of earning more on your refund while also not tying up access to your money long-term.
How much can my tax refund earn with a CD?
It will depend on what your tax refund is and which CD you decide to keep it in. For example, say you receive the average tax refund of $3.300.
Here’s how much it would earn in the following scenarios:
Obviously, the longer you store your money away, the more it will earn. However, keep in mind with longer-term CDs you’ll have to be okay not having access to it for years at a time.
If you don’t feel comfortable doing that, but want to earn a higher rate of return, you can allow a shorter term CD to renew once it matures. Some banks and credit unions will do this automatically for you.
Before allowing the renewal, check around to ensure the rate you receive is still competitive.
Are CDs right for me?
CDs work best if you have enough cash on hand where you can devote a portion of it to a CD, and not have to worry about having access to it. However, if you don’t want to lock away your money without access to it, CDs won’t be the best solution.
Instead, consider these two alternatives:
- Money market account: A money market account (MMA) helps you earn a rate of return on par with CDs and high-yield savings accounts. The difference is with a MMA you also receive check-writing privileges and a debit card, giving you quick access to your cash if an emergency arises.
- High-yield savings account: A high-yield savings account also grants you quick access to your cash when you need it. Unlike a money market account, you won’t have a debit card or check-writing capabilities. You can withdrawal money using an ATM or transfer it to another account.
The bottom line
Tax refunds are slightly higher than last year. If you plan to receive one and want to grow it, a certificate of deposit is a risk-free way to earn up to a few extra hundred dollars.
Just remember CDs work best when you leave the money alone until the maturity date. If you need access to it beforehand, the penalties you’ll pay will likely offset any interest earned.