Investors who are looking for safe investments often look to certificates of deposit, or CDs. These savings certificates pay a guaranteed, fixed interest rate for a specified period of time. For this reason, they are considered “time deposits,” because you agree to leave your money on deposit for a certain period of time.
CDs are a popular way to save money with no risk and a guaranteed interest rate. Here’s what you need to know about CDs.
What Is a CD Account?
A CD account is simply a bank account that holds a certificate of deposit. Because a CD is a time deposit and the interest rate you earn is based in part on how long the bank gets to keep your money, each CD you buy will have its own account. You can’t add to a CD account, nor can you withdraw from it early without paying a penalty.
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The length of time you need to keep your money in a CD varies, but it is set at the time you open the account. The end of the time period is called the maturity date. At the maturity date, you can withdraw your original investment plus the interest earned during the term. You then have the option to invest the money in another CD.
Common terms for CDs are 12 months, two years and five years, but other terms are available. The longer the term, the higher the interest rate. If you withdraw the money from the CD before the maturity date, you’ll pay a penalty.
Because they’re insured by the FDIC, CDs are low-risk investments. If the bank that issued your CD fails, you will still get your money back. The FDIC covers up to $250,000 per depositor, per bank, so all your accounts at one bank will be covered up to that limit. If you have more than $250,000 in deposit accounts, like CDs or savings accounts, you should keep them at more than one bank.
Types of CDs
Some financial institutions offer CDs with specialized terms. Here are some of the different types of CDs that banks and credit unions offer:
- Jumbo CD: With a jumbo CD, you deposit a greater amount of money than a regular CD, and earn a better interest rate. Most jumbo CD rates require a $100,000 deposit.
- Liquid CD: Sometimes called a no-penalty CD, a liquid CD doesn’t charge a penalty if you take out money before the maturity date. Liquid CDs usually pay a slightly lower interest rate in exchange for this convenient feature.
- Bump-Up CD: A bump-up CD lets you move to the current interest rate once or twice during the term of the CD. The ability to raise your CD rate is an attractive feature when interest rates are low but are likely to rise because you don’t get locked into a low rate for a long period of time.
- IRA CD: An individual retirement account CD isn’t actually different from a regular CD. It simply refers to a CD that’s used as an IRA. Like any IRA, you fund your CD with pre-tax money and pay taxes on the money when you withdraw it in retirement. If you get an IRA CD and decide you want to do something else with the money at the maturity date, you’ll need to roll it over into another IRA account or you might lose the tax advantage and incur a penalty.