Your Guide To Market-Linked CDs

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A market-linked CD is a type of CD where your returns are tied to how certain markets, like the stock market or bond market, perform. For example, it might be linked to the Dow Jones or S&P 500.

People also call these CDs by other names, including:

• Equity-linked CD
• Market-indexed CD
• Structured CD
• Index CD

How Market-Linked CDs Work

A market-linked CD ties its return to the performance of a specific market index — like the S&P 500 — rather than paying a fixed interest rate. When the index goes up, your return goes up with it. When it underperforms, you may earn little or nothing.

Here’s what makes them different from a standard CD:

• Your principal is protected. Even if the market drops, you generally get your original deposit back at maturity — the same guarantee that makes traditional CDs appealing.
• Your return is not guaranteed. Unlike a standard CD, there’s no fixed APY. A strong market year could mean a significantly higher return. A flat or down market could mean zero.
• Some offer a minimum return floor. Certain market-linked CDs guarantee a small base return regardless of market performance — but not all do. Always check the terms before committing.

The trade-off is straightforward: you’re giving up the certainty of a fixed rate in exchange for the possibility of earning more if the market cooperates.

Key Benefits of Market-Linked CDs

Market-linked CDs come with a few benefits that investors should know.

Higher Earning Potential

Market-linked CDs have a participation rate that determines how much of the market’s growth you’ll earn. For example, if the market goes up 15% and your CD has a participation rate of 75%, you’ll earn 11.25% — which is 75% of 15%. A CD’s participation rate can be more or less than 100%, so make sure to read the fine print.

This is different from traditional CDs and savings accounts.

• Traditional CDs have a fixed interest rate. So you know how much you’ll earn when the CD matures
• Savings accounts, on the other hand, also pay interest, but the rate can change with market conditions
• Neither of these offers the potential for larger gains like a market-linked CD

Portfolio Diversification

Combining traditional and market-linked CDs can give your investment portfolio a bit of variety. Both types protect your original deposit but they work differently:

• Traditional CDs pay a fixed interest rate
• Market-linked CDs give you a chance to earn more if the market does well

Principal Protection

The best feature of a market linked-CD is the guarantee of principal. All bank-issued CDs are insured by the FDIC for up to $250,000. This includes market-linked CDs as well. So, while there is potential upside with a market-linked CD, there is no risk to principal.

Who Should Consider Market-Linked CDs?

Market-linked CDs can be a good fit for certain types of investors, including:

• Conservative investors who want the chance to earn more without risking the original deposit
• Retirees or those nearing retirement who might have a lower risk tolerance but are still seeking growth
• Anyone seeking variety in their investments by adding a low-risk option with growth potential

Comparing Market-Linked CDs to Traditional CDs

Here’s a side by side comparison of market-linked CDs vs. traditional CDs.

If you’re looking for a guaranteed rate of return with regular interest payments, a traditional CD is likely a better option for you.

If you’re looking to preserve your original deposit and are hoping for greater returns, a market-linked CD is preferable.

Tax Implications of Market-Linked CDs

One of the big negatives of market-linked CDs is that they subject the owners to tax on “phantom income.” Phantom income is money that you earn but aren’t actually paid.

For example, if your CD earns 5% in a year, that gain gets added to the value of the CD but isn’t paid out to you. Even so, the IRS treats it as taxable income, so you’ll need to pay tax on it annually.

Income Tax

Even if your market-linked CD performs well, any gains are taxed as ordinary income — not at the lower capital gains rate you’d get from holding stocks or funds directly.

Here’s why that matters:

• Long-term capital gains rates can be as low as 0%. If you invested directly in the stock market and held for more than a year, your gains could be taxed at 0%, 15%, or 20% depending on your income.
• Ordinary income tax rates go up to 37%. Market-linked CDs don’t qualify for preferential capital gains treatment, regardless of how long you hold them.
• One way to soften the tax hit: Many investors hold market-linked CDs inside a tax-advantaged account like an IRA. That way, you don’t owe taxes on gains annually — only when you withdraw the money from the account.

If tax efficiency matters to you, factor this in before choosing a market-linked CD over a direct market investment.

Tips for Choosing the Right Market-Linked CD

Here are a few tips to help you choose the best market-linked CD for your needs:

• Assess your risk tolerance and investment goals: Even though they have the name “CD” in their description, market-linked CDs are a completely different investment type than traditional CDs. While both are appropriate for investors with lower risk tolerances, traditional CDs are generally for income investors, while market-linked CDs offer the potential for limited growth.
• Use online tools to compare CD options: The financial services market is extremely competitive. You can likely find a wide variety of features and benefits, such as participation rates, term lengths and withdrawal options, if you shop around.
• Look for trusted banks and well-defined terms: As market-linked CD are specialty products, it’s generally best to stick with well-known, trusted banks. Since each bank can essentially create its own CD terms, you’ll want to avoid banks and products that don’t specifically outline exactly what you’re getting if you invest in a market-linked CD.

Barri Segal contributed to the reporting for this article.

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