The S&P 500 has a total return of 10.12% year-to-date. However, that includes everything from Super Micro Computer’s (SMCI) 179.3% profit to Tesla’s (TSLA) 32% loss. Proving that although you can make money in the stock market, you can also lose.
On the other hand, the best CDs are paying more than 5% yields, and the highest-paying HYSAs are returning about the same. Best of all, unlike the stock market, those returns are virtually risk-free.
Of course, certificates of deposit and high-yield savings accounts don’t offer the same kind of opportunity for outsized gains that investing in the stock market through an IRA or brokerage account does, but they also won’t bring you the kind of losses that some stocks bring shareholders.
This leads many investors to ask: In today’s volatile market, where is the best place to put my money—CDs and HYSAs or IRAs and brokerage accounts?
What’s the Difference? This All Sounds Like Alphabet Soup to Me
CDs, HYSAs, IRAs and brokerage accounts offer different opportunities and risks. You should know what it means to put your money in each.
What Are CDs and HYSAs?
CDs and HYSAs have some similarities, such as their risk profiles, potential returns and being insured by the Federal Deposit Insurance Corporation, or FDIC, but that’s pretty much where the similarities end.
Certificates of deposit. Banks issue CDs, which are vehicles for storing your money for a set period. The money you put into a CD earns interest while the bank holds it, and it will be returned to you—both principal and interest—at the agreed-upon date. You can sometimes withdraw money early from a CD, but if you do, you’ll usually have to pay a penalty.
High-yield savings accounts. HYSAs are typically run by banks as well. They pay their investors significantly more than a traditional savings account, sometimes up to 15 to 20 times more. Although you can usually withdraw your money from a HYSA, you are legally limited to six withdrawals per month before having to pay a fee. Also, unlike a CD, your interest rate in a HYSA isn’t fixed. The bank can change it at any time.
What Are IRAs and Brokerage Accounts?
Being able to purchase and hold stocks, bonds and funds in them is one thing that IRAs and brokerage accounts have in common. However, the two types of accounts also have significant differences.
Investment retirement accounts. Investors can deposit pre-tax money into a traditional IRA and invest that money in any number of securities, including stocks, bonds, funds and other vehicles, sometimes even CDs. Inside the IRA, your money grows tax-free until withdrawn after retirement. If you withdraw your money before retirement, you must pay a penalty. You should also keep in mind that you can only add up to $7,000 to your IRA each year.
Brokerage accounts. Brokerage accounts can purchase and hold the same—and oftentimes more— investments as IRAs, and there’s no limit to how much money you can add each year. However, unlike with an IRA, the money in your brokerage account has already been taxed. You must also pay capital gains taxes on any holdings you sell for a profit. This can be offset by selling other securities in your account for a loss in a process known as tax-loss harvesting.
CDs and HYSAs vs. IRAs and Brokerage Accounts
Now that you’ve made sense out of the alphabet soup, let’s take a closer look at some of the most glaring differences between CDs, HYSAs, IRAs and brokerage accounts.
Returns
You invest your money to make money. You’re either saving for a purpose or you want to retire how and when you want.
With an HYSA or CD, the amount you earn on principal is limited to the agreed-upon rate. In a brokerage account or IRA, the sky’s the limit. However, most investors should remember that the S&P 500, a regular proxy for the broader stock market, has only returned 10% on average each year since 1957.
You can use any number of tricks and tools to try to beat the S&P’s average annual return. But most investors simply won’t.
Still, a 10% average annual return invested in the best S&P 500 index funds is significantly higher than today’s annual inflation rate of around 3.5%, and it is nearly double the slightly more than 5% interest the highest paying CDs and HYSAs are paying. Of course nothing with the stock market is guaranteed. Although your gains have no cap, neither do your losses.
Liquidity
Brokerage accounts and HYSAs are more liquid than IRAs or CDs. There are rarely any penalties for transferring money from a traditional brokerage account. Provided you’re buying and selling relatively liquid vehicles, such as stocks traded on major exchanges, the only thing that might hold up your money is waiting for the sale of assets to settle in your account.
With an IRA, since the money is meant to be saved for retirement, most withdrawals before 59 ½ are subject to a 10% penalty unless you withdraw for a pre-approved reason, such as certain hardship distributions. This means any money in an IRA is tied up until you retire, at which point you should be able to withdraw freely.
HYSAs also allow for withdrawals. However, federal law limits you to no more than six monthly withdrawals before paying a fee, which is determined by the individual bank.
With CDs, your money is tied up until the agreed-upon payout date. If you wish to withdraw money from a CD before that date, you will pay a penalty. Usually, that penalty is a predetermined percentage of interest, such as 12 months’ interest on a five-year CD.
Fees
Most brokerage accounts and IRAs do not charge fees or commissions on traditional stock, ETF or mutual fund trades. However, more complex derivatives trades, such as options and futures contracts, often have per-contract fees. You can’t usually trade derivatives in IRAs.
The money you earn in your IRA is tax-free. You pay no taxes on any gains until you withdraw. Profits from the sale of stocks, bonds and funds in a regular brokerage account are taxed as capital gains.
Most mutual funds and ETFs in your IRA or brokerage account will charge an expense ratio as well. This is a percentage of assets under management paid to help cover the funds’ management and trading expenses. These can be anywhere from around 0.05% to more than 1.00%.
Since actively managed funds tend to have greater trading fees to pass onto shareholders, a passively managed index fund usually charges you less than an actively managed fund. You should always be aware of a fund’s expense ratio before purchasing.
Most HYSAs do not charge fees, but some do. You will have to pay taxes on any interest you earn in a HYSA, and your interest rate on a HYSA is not locked in. The bank can change it at its discretion. Before choosing a HYSA, you should read all the terms and conditions that apply to your account.
CDs should not charge any fees, but your interest will be taxed at the same level as your ordinary income. This could be anywhere from 10% to 37%.
Risks
Investing in the stock market is riskier than having a bank hold your money. A CD pays a guaranteed rate, and a HYSA pays the agreed-upon rate unless and until that rate changes. At that time, you could withdraw your money and put it elsewhere. IRAs and brokerage accounts only pay what your investments return, and the market dictates those.
Money a bank holds is insured by the FDIC—the National Credit Union Administration insures credit unions. Should your institution fail, the FDIC or NCUA insures your money at each institution where you hold an account for up to $250,000, meaning you should never lose any principal.
Neither organization insures investments held in an IRA or brokerage account unless they are in CDs or savings accounts, which some IRAs and brokerage accounts allow.
Cash and investments held in a brokerage account or an IRA are usually insured by the Securities Investor Protection Corporation, or SIPC, for up to $500,000 per account. It’s important to remember that SIPC insurance only covers your investments if the company holding them fails.
Any losses you incur in an IRA or brokerage account due to volatility are yours. Your principal is always at risk in the markets.
Which Is Right for You: CD, HYSA, IRA or Brokerage Account?
Deciding where to put your money is a personal choice. It depends on your investment goals, timeframe and risk tolerance. You should consider all these factors when deciding between CDs, HYSAs, IRAs and brokerage accounts.
- What are your goals? IRAs are designed to help you maximize savings when planning for retirement. But if you want to trade more exotic vehicles, such as options and futures, you’ll probably want a brokerage account. If you want to keep your money safe and know precisely when you’ll need it, a CD offers predictable returns. HYSAs might offer guaranteed interest, but their liquidity usually keeps their rates lower than CDs.
- What is your timeframe? HYSAs keep your principal safe, and you can withdraw from them at any time. With CDs, you know exactly how much money you’ll have and when, but if you won’t need your money until retirement, IRAs might make more sense. In an IRA, your money grows tax-free. IRAs also take advantage of the stock market’s 10% average annual return, although traditional brokerage accounts offer greater liquidity.
- What is your risk tolerance? The stable interest rates on HYSAs and CDs are influenced by the federal funds rate. When that rate is higher, usually during economic downturns, you earn more. That might help some sleep better during volatile times, but investors who can stomach the stock market’s volatility will likely see the highest returns over the long run. With access to more investment options, traditional brokerage accounts offer more opportunity for outsized gains than IRAs.
