Sold by banks and backed by the FDIC, certificates of deposit are low-risk investments that earn interest over a specified term. CD terms can range from seven days to 10 years — depending on your needs.
You can open a CD account through a bank, either online or at a local branch. To apply, you'll need your Social Security number, a valid ID and the money for the opening deposit. Here are details on how to invest in CDs and why you'll want to compare CD rates before choosing one.
Benefits of Investing in a CD Account
CDs are a flexible option for investments, because you can choose your term. A term is the duration your cash is in the CD before you can make a withdrawal and the duration can range from as few as seven days to 10 years. The most popular terms for regular CDs are typically between two and five years.
Other notable benefits aside from flexibility include:
- Security: Your money is backed by the FDIC.
- Fixed rates for fixed terms: Fixed investments makes it easier to plan for your financial future.
- Higher interest rates: You have the ability to earn higher interest than most regular savings accounts.
- Increased earning potential through CD laddering: Divide your deposits into ascending terms 12 months apart.
Find Out: How CD Laddering Works
When Should You Open a CD Account?
The right time to open a CD account depends on your financial goals. First, consider whether you can part with a large amount of cash for the whole term of your CD. Doing so should help you decide when to open an account and the length of the term.
Another factor to consider is the current CD interest rates. If you see that interest rates are on the rise, you might want to choose a short-term CD. Conversely, when rates drop, which is usually when the economy is slowing down, then your best bet for a higher interest rate is a long-term CD.
For example, the 2017 Federal Reserve rate hike isn't necessarily going to affect CD investment rates in the near future. Because rates are on the rise, it might be best to invest in a short-term CD for the time being.
Check Out: 10 Best CD Accounts of 2017
How a CD Account Compares With a 401k
Many retired adults or those nearing retirement might consider CDs over other popular investing tools, such as 401ks, because CDs are safe and predictable. Deciding whether to put more money in your 401k or buy a CD as you near retirement can potentially save you money and offer some peace of mind.
For many, moving money out of a 401k and into a CD is a better option because money in the CD earns interest and is backed by the FDIC.
Risk factors include the length of time you participate in the 401k plan, whether your employer contributes to your plan, how much is invested and how well your investments do over time. And though the FDIC won't guarantee the growth of your 401k, the federal government does protect the account from abuse by employers.
How a CD Account Compares With a Roth IRA
A Roth IRA is a common investment strategy that include CDs, mutual funds, stocks and even real estate. The money invested in a Roth IRA has already been taxed, so no additional tax is taken out after retirement when the funds are distributed.
If you're nearing retirement, you can protect your assets by moving your money from the stock market to CDs. One way to do this is to invest in a CD with your brokerage. You can avoid opening multiple accounts because firms typically work with other financial institutions that offer CDs.
Advantages of CD investments for retirement include the following:
- Assets insured by the FDIC for up to $250,000
- Higher interest rates guaranteed for your CD term
- Less risk for people nearing retirement or already retired
- Flexible term options that allow investors to choose the duration of their CDs
Invest Safely in a CD Account
CD accounts are safe, reliable, flexible ways to earn interest on money that you wouldn't otherwise be using. They offer higher interest rates than traditional savings accounts, plus more stability than other investments. Whether you want to save for retirement or an upcoming purchase, you might want to consider a CD.
You'll need to be able to part with a certain amount of money for a period of time — whether that's a month, a few years or more. Compare rates and term conditions at various banks and financial institutions before committing to a CD account.