What are you really earning on your CDs?

In saving for retirement, you may be investing some of your “safe money” in a certificate of deposit (CD). CDs can offer:

Low risk.
Higher interest rates than bank savings deposits
Insurance by the Federal Deposit Insurance Corporation (FDIC).

However, have you considered the impact that taxes on interest and adjustments for inflation may have on your overall rate of return?

Generally, the interest received in these types of vehicles may not keep pace with inflation. This could mean lower purchasing power for you over time. Also, at renewal, a new rate along with a new withdrawal penalty may apply.

In 22 of the past 30 years, CDs have had a negative return (after taking into account the impact of taxes and inflation), and in five of the positive years, they earned less than a 1% real rate of return.

Returns are further reduced with increases in tax brackets. All investment portfolios should be constructed with tax-efficiency in mind. Our team at Claro Advisors can assist with presenting safe and higher after-tax yielding alternatives to CDs.

Generally, CDs are part of the FDIC insurance amount of $250,000 per depositor, per bank. The CD return rates on the right are calculated using the six-month annualized average monthly CD rate as reported by the Federal Reserve. The tax rate used in the example is the highest marginal federal income-tax rate based on $100,000 of taxable income for a married couple filing jointly. The tax rate is not the experience of every investor, and a lower tax rate may have a more favorable impact on the real return. Past performance does not guarantee future results.

¹ Board of Governors of the Federal Reserve System. “H.15 Selected Interest Rates 01/01/1993–12/31/2022.” Data Download Program (6-month Treasury bill secondary market rate discount basis). Last accessed April 10, 2023.

² “Historical U.S. Federal Individual Income Tax Rates & Brackets, 1862-2021.” Tax Foundation. Last accessed May 24, 2023.; “IRS provides tax inflation adjustments for tax year 2022.” IRS. November 10, 2021.

³ Inflation rates are based on the percent change from the previous December’s Consumer Price Index (CPI), a measure of change in consumer prices. Source: U.S. Department of Labor’s Bureau of Labor Statistics. “Historical Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all items, by month.” Last accessed April 10, 2023.