As interest rates fall, long-term CD rates won't stay above 4% APY for long. What should you do with your cash?

• A long-term CD needs to fit with your financial goal and risk tolerance to be worthwhile. 
• A CD ladder can help you take advantage of long-term and short-term CD rates. 
• People comfortable taking more risk likely won't find long-term CD rates compelling enough.

The best CD rates for terms of three to five years are above 4% APY, but you won't be seeing them for much longer.

The CD interest rate environment is changing. The Fed is expected to cut rates soon, possibly at the next meeting in September.

"As rates typically do fall, we're going to see banks get less competitive about keeping cash on hand," explains Lauren Williams, CFP® professional and cofounder of ProsperPlan Wealth.

Short-term CDs still have some way to go, with top rates still hovering around 5% APY, but there's less room for competitive rates on long-term CDs. This begs the question: Is it worth it to open long-term CD right now, or are there better options?

Should I lock in longer-term CD rates now?

Locking in a long-term CD rate could be a good option if it fits your financial goals and you want to keep money in a low-risk place.

For example, Williams says that a long-term CD could be suitable for a more conservative investor who cannot stomach participating in the overall stock market.

CDs are still offering strong rates on cash. However, people who are comfortable taking more risk may not find long-term CD rates as appealing as other options.

"If you don't need the money for more than three years, you're probably going to want to look to something that's going to have a better growth rate long term," adds Williams.

Furthermore, while CD interest is offered at a fixed rate and guaranteed as long the account reaches maturity, it might not be worth tying up your money for a longer term.

"We are in an environment still where short-term rates are higher than what's paid long term. The reason why is banks don't want to commit to paying fixed rates beyond a certain period of time," says Marguerita Cheng, CFP® professional and CEO at Blue Ocean Global Wealth.

One solution that allows you to take advantage of both short-term and long-term CD rates is building a CD ladder, folding in high-rate, shorter-term CDs.

"The benefit of the CD ladder is is you are having money mature on a regular basis, and you're minimizing interest rate risk," says Cheng.

CD ladders require maintenance, though. You'll have to stay on top of various maturity dates to avoid early withdrawal penalties and reassess whether each CD renewal is the best option for you. If you don't want to commit to maintaining a CD ladder, there are alternative options to long-term CDs.

Alternative options to long-term CDs

If you're seeking a low-risk account, Treasury bills, or T-bills, are an alternative option to CDs. Williams says she typically favors T-bills over CDs because they have more favorable tax rates on income.

CD earnings are taxed as ordinary income, so your rate will depend on what tax bracket you're in. In comparison, you have to pay federal taxes on interest earned on a T-bill but not state taxes, which could be more beneficial.

Something to keep in mind is that Treasury bills aren't protected by FDIC insurance like CDs. With a CD, you know that your account balance is federally insured for up to $250,000 in individual bank accounts and $500,000 in joint bank accounts. Treasury bills are backed by the full faith of the U.S. government, though, so they are still low-risk and secure, overall.

You can also consider other types of fixed-income investments, however, you'll need to assess risk tolerance to decide if another type of investment is worthwhile.

If you're more focused on having access to your money, a high-yield savings account can be another option. 

"There's nothing wrong with erring on the side of caution. If you think that you need to have a little bit more cash, it's true that it may not earn as much in a high-yield savings account, but remember, in a high-yield savings account, you can get your money," says Cheng. 

Even though they have a variable interest rate, high-yield savings accounts allow you to deposit and withdraw money at any time. The best high-yield savings account rates are also still around 5% APY.

How to decide the best option in a declining interest rate environment

As rates are declining, it's important to look at your overall financial strategy and consider individual financial goals. Having a concrete idea of when you'll need money to reach a certain goal, can also help you assess risk tolerance.

For example, if you're planning on buying a house soon, Cheng says it's important to avoid taking on market or investment risk.

"Maybe the Fed will start cutting rates. They indicated that they're making an improvement with inflation. They are meeting in September. We have no idea if they'll cut it by 25 basis points or 50 basis points," says Cheng.

To help narrow down safe investment options, you can compare opening requirements, interest earnings potential, fees, and account accessibility.

Overall, a changing interest rate environment gives you a chance to examine your money and decide if it could be in a better place.

Long-term CD FAQs

What is a long-term CD?

A long-term CD is a bank account that lets you lock in a fixed interest rate for several years. Many banks offer long-term CDs of two years, three years, and five years. You may also find terms as long as 10 years at a few places.

Are long-term CDs worth it?

A long-term CD could be worth it if it fits your overall financial strategy and want to earn guaranteed interest for a specific purpose. A long-term CD may also be a good option for anyone who prefers keeping money in a low-risk account. It may not be worthwhile if you need an account with more liquidity, or want higher returns.

What are the disadvantages of the longer-term CD?

The biggest disadvantage of long-term CDs is that you have to keep money in your account until it reaches maturity. You also can't make additional deposits unless you've opened an add-on CD.