Investing In Certificates of Deposit: The Ultimate Guide

Know about the pros and cons of CDs before you invest.

A certificate of deposit is a safe, income-generating investment that is insured by the Federal Deposit Insurance Corp. up to $250,000. Depending on which financial institution you bank with, your bank or credit union’s CD products might also be referred to as:

  • Term certificates
  • Term CDs
  • Savings certificates
  • Time deposits

A number of different types of CDs are available, as well as various strategies to maximize your earnings. For example, a GOBankingRates study recently found that 96% of Americans aren’t taking advantage of the CD laddering strategy, which can provide higher returns than savings accounts while still offering federal insurance. So before you tie up your extra cash in a CD, learn about all the options to find out which CD might be right for you.

Think of certificates of deposit as interest-bearing savings accounts — with a few key differences. A CD is sold by financial institutions like banks, brokerage houses and credit unions. CDs are considered a low-risk investment because they are generally FDIC-insured up to a high limit and because, when held to the end of the term, a CD will return the full amount of the original investment plus interest.

Because of the way they are structured, CDs can be ideal if you have extra cash that you won’t need for an extended period and want to earn more interest than you would from a money market or savings account, without having to risk the principal investment. Here’s a look at some of the basic characteristics of CDs, along with information that can help you choose the best CD account for you.

This guide to certificates of deposit will cover:

What Is a Certificate of Deposit and How Does It Work?

A CD is a type of time deposit, meaning you agree to leave your money with a bank or other financial institution for a specified period of time. In exchange, your bank agrees to pay you interest and return your principal at the end of the time period. Typically, a CD matures between six months and five years, although CDs come in shorter variations (like three months) as well as longer ones (like 10 years).

A CD differs from a traditional savings account in two primary ways. First, a savings account doesn’t usually have the withdrawal restrictions that a CD does. You can access the money in your savings account whenever you’d like, subject to federal requirements that prohibit more than six transactions of certain kinds per month. A CD, on the other hand, charges significant penalties if you take your money out before maturity, often ranging from a few months’ of interest to all of the interest you’ve earned. Second, a CD will often pay more in interest than a savings account. This is not always the case, as online savings accounts are now quite competitive with CD rates. But in many instances, you can earn more by locking your money away in a CD than you can by investing in a more liquid savings account.

For example, over the past 10 years, the average national rate on a 12-month CD has ranged between a low of about 0.19% to a high of about 1.27%. Over that same time period, the national average savings rate has ranged from about 0.06% to 0.22%. There are plenty of accounts that pay higher-than-average rates, but comparatively speaking, you can often earn more in a CD than you can in a savings account.

Long-term CDs typically pay higher rates than short-term CDs, but there’s a catch: If rates go higher while you’re invested in a long-term CD, you’re essentially stuck with the rate you have until maturity. Although you can take out your money at any time, you’ll get hit with the early withdrawal penalty, which varies from bank to bank.

Here’s a look at CD rates at 10 banks:

CD Rates
BankAPY for 12-Month CD APY for 60-Month CD 
Barclays logo 2017Barclays Bank Delaware2.10%2.20%
Capital OneCapital One Bank (USA)2.20%1.60%
Marcus by Goldman Sachs logo 2017Marcus by Goldman Sachs2.00%2.45%
First Internet Bank logo 2019First Internet Bank1.87%2.17%
Synchrony Bank2.70%3.10%
TIAA logo 2017TIAA Bank2.50%2.70%
Discover logo 2017Discover Bank2.10%2.20%
VirtualBank logo 2019VirtualBank2.00%1.95%
Ally logo 2017Ally Bank2.00%2.25%
SunTrust bank logoSunTrust Bank1.60%2.30% (58-month CD)
Rates are updated weekly.

Learn: How Often Do CD Rates Change?

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Different Types of CDs at a Glance

Almost as many types of CDs exist as there are types of savers. Use this guide to help narrow your search and find the type of CD that will best suit your financial goals. Here are the types of CDs, including certificate of deposit pros and cons:

Types of CDS
CD TypeKey FeaturesFactors to Consider
Traditional CD
  • Pays a set amount of interest for depositing money for a set amount of time
  • Lacks flexibility
  • Penalty usually assessed for early withdrawal
IRA CD
  • Earns interest
  • Money only becomes taxable once withdrawn
  • Penalty assessed for early withdrawal
Variable-rate CD
  • Pays interest based on varying rate tied to agreed-upon index, such as the prime rate or Treasury bills, among others
  • Because rate will vary, it may be hard to predict how much you will earn
  • Penalty assessed for early withdrawal
Fixed-rate CD
  • Pays set rate of interest for entire life of the term
  • Examples include callable CDs, liquid CDs, brokerage CDs and traditional CDs
  • Can lock investors into low rates for long periods if a long-term CD is purchased in a low-rate environment
Jumbo CD
  • Requires a large investment, usually a minimum of $100,000
  • Pays higher interest rates than CDs with lesser deposit amounts
  • FDIC still only insures up to $250,000
Brokered CD
  • Offered by a stock broker, online brokerage or other investment professional who acts as deposit broker for the issuing bank
  • Might charge a flat fee or a percentage of investment amount
  • Some brokered CDs might be securities that are not FDIC-insured
Zero-coupon CD
  • Purchased at a deep discount and pays no interest
  • At maturity, buyer receives full face value, sometimes with a large profit
  • No interest or profit is paid out until maturity
  • CD holder must pay tax on “phantom interest” accrued annually
Bump-up CD
  • A bump-up CD allows you to “bump up” to the higher market interest rate if rates go up during the CD term
  • Generally, only one rate increase is allowed, if rates increase at all
  • Initial rate might be lower than that of a fixed-rate CD
Callable CD
  • Bank reserves the right to “call back” this type of CD at any time
  • Often has a higher rate than traditional CDs
  • If interest rates go down, bank can terminate the CD before its term is up, paying out the principal and interest due at that point
  • If rates go up, you do not have the option to cancel the CD before its termination date to invest at the higher rate
Liquid CD
  • Allows withdrawals at any time
  • Pays a lower interest rate than that of a non-liquid CD of the same term
Thrift CD
  • Offered by thrift institutions, such as credit unions and savings-and-loan institutions
  • You might need to be a member or hold another type of account with the institution
Uninsured CD
  • Not insured by the FDIC or by any other institution
  • Usually pays a higher interest rate than traditional CDs
  • If the CD issuer goes bankrupt, you could lose your investment
No-penalty CD
  • No fee charged for early withdrawal
  • Usually pays a lower interest rate than traditional CDs
Index-linked CD
  • Connected to a specified index, such as the S&P 500 or Dow Jones indexes
  • Return might be 100% of the index performance or another percentage, such as 90%
  • If the linked index declines, you run the risk of no profit
  • You will receive your principal back
Bear CD
  • Pays an interest rate inverse to the agreed-upon market index
  • If the linked index goes down, the CD earns interest
  • Speculative type of CD
  • Often used as a hedge against declining stock prices
Bull CD
  • Pays interest at a rate linked to a rising index, such as the Dow or S&P 500
  • If the market enters a bear phase and declines, you will still receive a minimum rate that must be paid
Add-on CD
  • Lets you add money to your CD before its maturity
  • Additional amount earns the same interest rate as the initial amount used to purchase the CD
  • Most add-on CDs only allow additional deposits of a specified minimum amount, such as $500

Term lengths, rates and minimum deposit requirements vary by institution and also depend on factors such as the federal funds rate.

Also See: 9 Tips for Choosing a CD Account

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What Are the Benefits of CDs?

The main benefits of a CD are income and safety. Not many investments come with a government guarantee, and CDs carry insurance of up to $250,000. This makes CDs an excellent choice for investors who absolutely need to protect their money. Some CDs also pay a very competitive rate, especially when compared with other guaranteed accounts like savings accounts.

As with most investments, there are various strategies you can employ when investing in CDs to try to maximize your return while still preserving the safety of your principal. One common CD investment strategy is laddering.

Consider These Options: 10 Best CD Accounts of 2019

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Types of CD Strategies

If you’re looking for a little more bang for your buck when it comes to investing in CDs, consider a CD investment strategy. Rather than simply buying a single CD, you can invest in a range of CDs to help you achieve your investment goals. Three strategies in particular, the CD ladder, CD barbell and CD bullet, offer different ways to enhance the return on your CDs. They can also help reduce certain risks that affect CDs, such as interest rate risk and liquidity risk.

CD Laddering

If you’re unsure about how long you want to tie up your money in CDs, or if you believe interest rates will climb in the near future, a CD laddering strategy might be right for you. CD laddering is a way to keep your investment somewhat liquid and can result in higher growth rates.

To create a CD ladder, simply divide up your total investment into smaller sums, buying CDs of varying terms. For example, instead of buying one CD worth $30,000, you might buy three $10,000 CDs — one each at six-, 12- and 18-month terms. By doing this, one-third of your money becomes liquid every six months.

When one CD matures, you can either use the cash for something else or reinvest it in another 18-month CD, keeping the ladder strategy going. In addition to added liquidity, this strategy also allows you to maximize interest rates because, upon the second round, you are always investing in longer-term CDs.

You can do this in any combination with any term lengths. If liquidity is of utmost importance, use shorter maturities, such as three-month terms. For less liquidity but higher rates, go for intervals of one year or higher.

CD Barbell

You can also use CD strategies that help combine greater liquidity with greater interest rates. One of these strategies is a CD barbell: You put half your investment into short-term CDs and half into long-term CDs. With this strategy, you’ll have some flexibility with the short-term investments and get better interest yield with the longer-term accounts. Overall, you’ll get a medium yield average.

CD Bullet

Another strategy is a CD bullet, in which you buy CDs that have the same maturity date at different times. So the first year, you buy a 10-year CD, the second year you buy a nine-year CD, and so on. With the CD bullet strategy, you minimize the risk of missing out on higher interest rates by staggering your purchase dates. A CD bullet strategy could be useful for maximizing savings for a specific goal with a predetermined payment date, such as college tuition or retirement.

Check Out: The 10 Best Short-Term Investments for 2019

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When Does a Savings Account Make More Sense?

A CD can be a tempting option for an emergency fund, because emergencies don’t happen very often for most people and CDs typically pay higher interest rates than savings accounts. However, emergencies, by their very nature, are unpredictable. If you suddenly get hit with a $1,200 car repair or a $3,000 medical bill, you don’t want to have to break your CD and pay interest penalties just to pay your bills. For the most part, emergency funds are better kept in more liquid savings accounts. Many online high-yield savings accounts have yields that rival the best CDs anyway, so keeping your emergency funds liquid usually makes more sense.

Related: 10 Best Savings Accounts of 2019

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Alternatives to CDs

CDs aren’t the only savings instrument available; many alternatives might better suit your particular needs and goals. Here are a few common alternatives to CDs:

Alternative Options to CDs
Alternative Account TypeKey Differences From a CDWhen To Use It
High-yield savings account
  • Typically offers a lower interest rate than a CD
  • Interest rate is usually variable
  • Access money without penalty
  • If you need access to your money before a CD would mature
Money market account
  • Typically offers a lower interest rate than a CD
  • Interest rate is usually variable
  • Access money without penalty
  • If you need to access your funds soon
U.S. Series I savings bonds
  • Issued by the federal government
  • Terms range from one year to 30 years
  • Maximum allowable purchase of $10,000 in bonds per year
  • Combination of fixed and variable interest rates in one bond
  • If you’re saving for a long-term goal, such as college or retirement
U.S. Series EE savings bonds
  • Issued by the federal government
  • Term ranges from one year to 30 years
  • Maximum allowable purchase of $10,000 in bonds per year
  • Fixed interest rate
  • If you’re saving for a long-term goal, such as college or retirement
Treasury bills
  • Sold at less than face value
  • Full value paid at a maturity date of one year or less
  • If you need your money within a year
Treasury notes
  • Government-issued investments
  • Specified interest rate paid every six months until maturity
  • Issued in two-, three-, five- and 10-year terms
  • If you want to earn a good interest rate but need your money within a decade
Treasury bonds
  • Government-issued investment
  • Specified interest rate paid every six months until maturity
  • Issued in terms of more than 10 years
  • If you have long-term saving goals, such as retirement

Find Out: What Is a Money Market Account?

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Is a CD Right for You?

When shopping for CDs, you’ll want to factor in more than just the interest rate. Before you open a CD, make sure it’s the right one for you by first answering a few important questions:

When will you need this money?

Most CDs come with heavy penalties for early withdrawal, so don’t let a higher rate seduce you into tying up money you might need soon. If there’s a chance you’ll need the money, choose a shorter term or a CD without a penalty for early withdrawal.

Do you have an emergency fund?

Make sure you aren’t using emergency funds for the CD. If you find yourself in a real emergency without dedicated emergency funds, you might end up resorting to using a credit card for your immediate expenses — and losing money by carrying a balance or having to take a cash advance.

Does the CD automatically roll over?

If the answer is yes, make sure you take actions to remind yourself of the date your CD matures. If you forget, the bank will roll the CD over automatically, and you won’t be able to access your money for another term.

Do you think interest rates will rise or fall?

The vast majority of CDs have a fixed interest rate for the life of the term. So, if you believe rates will rise in the future, perhaps you should accept a shorter term — and likely, a slightly lower interest rate — so you can renew to a higher rate later.

Can you accept loss on inflation?

If you are investing in a long-term CD, remember that there’s always a chance that inflation outpaces your interest. At that point, you’re actually losing buying power. Decide whether you are comfortable with that risk before proceeding with a long-term CD.

Keep reading to see nine safe investments with high returns.

Terence Loose is an award-winning writer who has covered topics ranging from finance to travel, fitness and education. 

John Csiszar contributed to the reporting for this article. He has written thousands of articles about financial services after serving for 18+ years in the industry. During that time, he earned his Certified Financial Planner designation, was a Registered Investment Advisor, and earned his Series 7, 63, 65 and Insurance licenses. 

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About the Author

Terence Loose is an award-winning freelance writer who writes about everything from travel and sport to fitness and finance. He is a Hawaii-based writer who has covered a broad range of topics during his 20-plus-year career, from finance and education to travel and celebrity. He is a former editor for both Movieline and COAST Magazines and his work has appeared in publications as diverse as COAST, Riviera and Movieline to the L.A. Times Magazine and Orange County Register.