Chasing the Highest CD Rate? You May Be Solving the Wrong Problem

Marc Lescarret, CFP(R), MPAS(R), AWMA(R) 8-14-26

Are CDs a good investment?

With certificate of deposit (CD) rates still attracting attention, many investors are asking where they can find the highest CD rate. But that may be the wrong question. Instead of asking, “Which bank has the best CD rate?” consider asking:

“What am I actually trying to accomplish with this money?”

A CD can be a useful tool for short-term cash needs. But for money you don’t expect to need for several years, focusing only on the advertised interest rate can distract you from what really matters: taxes, inflation, purchasing power, liquidity, total return, and long-term wealth creation.

A 4% CD sounds safe. But 4% isn’t necessarily what you actually keep.

The 4% CD That Could Really Be Paying You 2.4% Or Even Less!

One of the biggest drawbacks of CDs held in a taxable account is taxes. CD interest is generally taxed as ordinary income. For higher-income investors, federal and state income taxes can consume a significant portion of the interest they earn. For example, the 2026 calendar year federal income tax brackets we see pre-retirees often fall in the 22%-37% range; then add state tax and possibly the 3.8% Net Investment Tax.  When you combine all of these taxes, it is not uncommon to lose almost half of your income to taxes.

Consider a hypothetical investor with $100,000 in a CD paying 4%.

• CD investment: $100,000
• Interest rate: 4%
• Annual interest: $4,000
• Hypothetical combined marginal tax rate: 40%
• Taxes on the interest: approximately $1,600
• After-tax interest: approximately $2,400

That advertised 4% yield effectively becomes about 2.4% after taxes in this simplified example.

This is why I believe investors should spend less time asking, “What’s the highest CD rate?” and more time asking, “What’s my after-tax, inflation-adjusted return?”That’s the number that actually matters.

Inflation May Be Quietly Eating Away At Your CD

Many investors define investment risk as the possibility that their account balance could decline. But there’s another important risk that doesn’t show up as a red number on your statement:

Purchasing-power risk.

Imagine earning 4% on a CD but keeping only 2.4% after taxes. If inflation is running around that same level—or higher—your money may not actually be gaining purchasing power.

Your statement may show a larger account balance, but the cost of groceries, healthcare, housing, insurance, travel, and other expenses may also be rising. That’s why I distinguish between nominal safety and real financial safety. An investment can protect your principal in dollar terms while still failing to protect what those dollars can buy.

According to the US Bureau of Labor Statistics, core inflation as of the end of June 2026 was 2.6%, so when adjusting for taxes, the above example would have locked in a guaranteed purchasing power loss!

CDs Aren’t Bad. But They Need the Right Job.

I don’t believe CDs are inherently bad investments. They’re tools. And like any financial tool, they’re useful when they’re matched with the right job. If you know you’ll need $50,000 in six months for a home purchase, tax payment, tuition bill, or another major expense, protecting that money may be far more important than trying to grow it. That’s a situation where CDs, Treasury bills, money market funds, or similar short-term investments may be worth considering.

But what if you don’t need the money for three, five, or ten years? That’s a different conversation.

The longer your time horizon, the more important it is to consider the potential cost of sacrificing growth, tax efficiency, and purchasing power for the comfort of a fixed interest rate.

Why Are You Creating Income If You Don’t Need Income?

This is a question I frequently think investors overlook. Suppose you’re still working. Your salary comfortably pays your bills. You’re saving money every month. Do you actually need your investments to generate more taxable income today? If the answer is no, why is maximizing current interest income necessarily the goal? A CD held in a taxable account generally produces taxable interest as it’s earned. That can create additional taxable income during years when your tax rate is at the highest tax rate you may ever pay. By simply pushing certain investment gains into a different calendar year, you could save 40% or more in taxes. >>Ask Marc how this is possible

For some investors, capital appreciation may be more valuable than current income. That’s because unrealized appreciation generally doesn’t create a federal income-tax bill simply because an investment has increased in value. That can give investors more control over when gains are realized.

Income and Total Return Are Not the Same Thing

Yield is easy to understand.

“This CD pays 4%.” But investment success shouldn’t necessarily be measured by how much income an investment produces.

What ultimately matters is total return and whether your financial plan succeeds.

Total return considers both income and changes in the value of an investment. For nonretirement account investors, I would go one step further and focus heavily on after-tax total return. A higher-yielding investment isn’t automatically a better investment. An investment producing less current income but more long-term appreciation could potentially create a better after-tax result.

Your objective shouldn’t necessarily be to generate the most income. It should be to use your money in a way that gives you the best opportunity to accomplish your goals.

"I found income gives people the illusion of safety, and this is far from the truth!  A long-term 4% rate can lose value; for example, banks and long-term CD holders locked in CD and Treasury rates even lower than 2% but ended up losing as much as 30% of their investment because interest rates rose so quickly in 2022."

"During the 2021-2022 years, an investor seeking a net 1% income was likely dumbfounded when interest rates rose, and they suffered a double-digit loss in a supposidly risk free asset"

Don’t Forget About Asset Location

There’s another issue I frequently see with CDs: where investors own them.

People often keep CDs in taxable bank or brokerage accounts because that’s where they’ve always kept their “safe money.”

But an investor should consider two separate questions:

1. What investments should I own?

2. Which accounts should hold those investments?

This is known as asset location.

Interest-producing investments can be tax-inefficient when held in taxable accounts because their income is generally taxed annually.

Depending on an investor’s circumstances, it may make more sense to locate certain tax-inefficient investments inside retirement accounts while using taxable accounts for investments with greater tax efficiency.

There isn’t one answer that works for everyone. But ignoring asset location can create unnecessary tax drag.

Capital Appreciation Can Be a Powerful Wealth-Building Tool

Think about how substantial long-term wealth is typically created. It generally isn’t created by repeatedly finding the bank offering the highest interest rate. Ask yourself: what do the ultra-wealthy, such as Elon Musk or Bill Gates, do? They buy assets that appreciate, and a CD lacks that.

Businesses, stocks, real estate, and other appreciating assets have historically played major roles in creating wealth.

There’s an important tax distinction as well. Interest from a taxable CD generally creates taxable income as it’s earned. An investment that appreciates doesn’t generally create federal income tax merely because its market value increases. Taxes may instead be deferred until the investment is sold, or some estate planning tactics are utilized to mitigate and even eliminate the taxes >>Ask Marc how this is possible

That tax deferral can be valuable because money that hasn’t yet been paid in taxes can potentially remain invested and continue compounding.

Long-term investors may also have access to planning strategies involving:

• Tax-loss harvesting
• Strategic capital-gain realization
• Charitable gifting of appreciated securities
• Estate-planning strategies
• Potential step-up in cost basis at death under current federal tax law

This doesn’t make stocks or other appreciating investments “better” than CDs in every circumstance.

It means the way an investment produces its return matters.

Why Wealth Building and Income Investing Are Different

Look at many successful entrepreneurs and wealthy families. Much of their net worth isn’t sitting in CDs producing taxable interest every year.

Their wealth is frequently concentrated in assets that have appreciated over long periods of time—business ownership, stocks, real estate, and other investments.

That doesn’t mean the average investor should copy a billionaire’s portfolio. It illustrates an important distinction:

Income produces cash today. Appreciation potentially builds wealth for tomorrow.

If you’re still accumulating assets and don’t need additional income, concentrating too heavily on current yield may actually work against your long-term objective.

Appreciating Assets Can Also Create Financial Flexibility

A substantial taxable investment portfolio can potentially provide another planning tool: the ability to borrow against assets rather than immediately selling them.

Loan proceeds generally aren’t treated as taxable income because the money must be repaid.

For the appropriate investor, borrowing against investments can sometimes provide liquidity without immediately triggering capital gains from selling appreciated assets.

However, this isn’t free money.

Borrowing introduces additional risks and costs, including interest expense, falling collateral values, and potentially forced liquidation depending on the type of loan.

It needs to be carefully managed.

But it illustrates why building appreciating taxable assets can potentially provide financial flexibility beyond simply collecting interest.

CDs Have Interest-Rate and Reinvestment Risk Too

Investors sometimes think CDs have no risk because they intend to hold them until maturity.

But consider what happens if you lock money into a long-term CD and interest rates subsequently rise substantially.

Your principal may still be returned at maturity, but you’re stuck receiving your old, below-market interest rate while newer investments offer significantly higher yields.

That’s an opportunity cost.

And if you want to get out early, there may be early-withdrawal penalties. Brokered CDs sold in the secondary market before maturity can potentially be worth less than their original purchase price.

So saying, “I can’t lose money if I hold my CD until maturity,” isn’t the same as saying, “I made a good investment.”

Your dollars may come back. But what could those dollars have earned elsewhere? And how much purchasing power did they lose along the way?

“Safe” Doesn’t Have to Mean Avoiding the Stock Market Completely

Investors sometimes view their choices as two extremes:

Stocks = risky.

CDs = safe.

The real investment world is much broader than that.

There are numerous ways to design portfolios around different levels and types of risk, including:

• Diversified stock and bond portfolios
• Defined-outcome strategies
• Options-based hedging
• Protective puts
• Collar strategies
• Cash reserves
• Combinations of growth and defensive assets

For example, an investor who owns a stock trading near $100 could potentially purchase a protective put option to establish downside protection for a specific period. The cost of that protection could potentially be partially or fully offset by selling some potential upside appreciation, a call option—for example, agreeing to sell the stock at $120.

In exchange for limiting some upside potential, the investor may be able to define a range of potential outcomes.

This is commonly referred to as a collar strategy.

A collar is not the same as a CD. It isn’t FDIC-insured, it involves market and options risks, but when you have a specific goal, many strategies suchs as a collar strategy, can deliver a superior result.  Assume you are still working and would like to buy a car in two years, and you have $50k of cash, and you need to buy a $50k car.  You could buy a two-year CD that will preserve your $50k for when you need it, or you could purchase $50k of stocks and use a collar strategy to ensure that in two years, your value is close to $50k, but also has the potential to appreciate 20% or more over the two years. In both cases, you have some level of certainty; we have close to $50k in two years for a car, but in the ladder, you can mitigate some taxes and maintain more upside potential.

The takeaway:

You don’t always have to choose between accepting all of the stock market’s risk and avoiding the stock market completely. Risk can sometimes be managed, transferred, reduced, or reshaped.

The Illusion of CD Safety

So, are CDs safe?

If you’re talking about protecting nominal principal in an FDIC-insured CD held within applicable insurance limits and held to maturity, they can provide a high degree of certainty. But that’s only one definition of safety.

What about:

Inflation risk?

Your principal could buy less in the future.

Tax risk?

A significant percentage of your interest could disappear to federal and state taxes.

Opportunity cost?

Your money could potentially spend years earning substantially less than other investments.

Reinvestment risk?

When the CD matures, attractive rates available today may no longer exist.

Liquidity?

Accessing your money before maturity can potentially involve penalties or losses, depending on the CD.

Longevity risk?

Perhaps most importantly, an overly conservative portfolio may fail to grow enough to support decades of retirement spending.

Avoiding market volatility doesn’t eliminate financial risk.

It changes the type of risk you’re taking.

Before Buying Another CD, Ask These Questions

Instead of immediately searching Google for the highest CD rate, ask:

• When will I actually need this money?
• Do I need income today?
• What is my federal and state marginal tax rate?
• What will I keep after taxes?
• What is my expected return after inflation?
• How much liquidity do I need?
• Should this investment be held in a taxable account or a retirement account?
• Am I investing for current income or long-term growth?
• How much investment risk can I afford?
• How much risk do I actually need to take?
• Would a diversified or risk-managed investment strategy better match my time horizon?
• How does this decision affect my overall retirement plan?

Those questions could be far more important than whether one bank pays 4.00% and another pays 4.20%.

Stop Chasing Rates. Start Building a Strategy.

CDs have a place in financial planning. For emergency reserves, upcoming purchases, known short-term expenses, and other near-term cash needs, they can be valuable tools. But a CD shouldn’t automatically become a long-term investment strategy simply because it feels safe.

The biggest financial risks aren’t always the ones that make your account balance turn red.

Sometimes the bigger risks are harder to see: taxes, inflation, lost purchasing power, opportunity cost, and insufficient long-term growth.

So the next time you’re tempted to spend hours searching for the highest CD rate, consider asking a different question:

“What is this money supposed to accomplish for me?”

And then ask an even more important one:

“What strategy gives me the best opportunity to accomplish that goal after taxes, inflation, and risk?”

Because ultimately, the highest advertised rate isn’t what matters.

What you keep—and what your money allows you to accomplish—is what matters.

 
This material is for educational and informational purposes only and should not be considered individualized investment, tax, or legal advice. Investment strategies, including stocks, options, buffered or defined-outcome strategies, involve risk and may not be appropriate for all investors. CDs and bank deposits may be eligible for FDIC insurance, subject to applicable limits and requirements. Tax treatment varies based on individual circumstances and may change. Investors should consult with appropriate financial, tax, and legal professionals regarding their specific situation.