Certificate of Deposits (CDs)
Updated on Mar 02 2018
A Certificate Deposit (CD) is a special type of savings account offered by banks or credit unions that can offer fixed rates for fixed terms. A CD provides an easy, sensible way of saving money while earning interest. Typically, you must keep your funds in the CD for a specified period of time to avoid penalties.
What is a CD?
Certificate of Deposits are a form of savings that have a maturity date. You can think of them as ‘time deposits’ where you agree that you will not withdraw funds until the maturity date for the term you choose, which can be anywhere from a few months to several years after you open the account.
Penalties for early withdrawal can be quite stiff and will cause you to lose interest, and possibly principal. It’s important to note that Federal regulations set only the minimum early withdrawal penalty for traditional CDs, which means there is no law preventing an institution from enacting tougher penalties. Detailed account and penalty information will be disclosed when the account is opened, so you’ll need to pay close attention to determine whether the CD is right for you.
How are CDs different from savings accounts?
CDs generally offer higher interest rates than savings accounts, so you can get a greater return on your investment over time. Savings accounts offer variable interest rates with the higher interest rates generally being for higher minimum balances. Also, savings accounts don’t generally have fixed terms, and CDs have fixed terms; which means you can’t withdraw money without paying a penalty until the CD reaches the agreed upon maturity date.
Choosing between a savings or CD usually comes down to whether you are looking for higher interest rates or easier access to your money. Both accounts are relatively conservative investments.
When can I take money out of a CD?
You can take money out of a CD at any time, but if you withdraw before the CD matures you’ll need to pay an early withdrawal penalty. Generally, various banks give you a four- to six-day grace period to withdraw your money without penalty after you fund your account. What is CD laddering?
CD laddering is when you open multiple CDs with different maturity dates. This savings strategy allows you to keep some of your money in long-term, high interest CDs, while also giving you regular access to your money as shorter-term CDs mature
What are the different types of CDs?
There are many types of CDs, each with different interest rates and terms. Here are a few:
Traditional CD – Traditional CDs are a fixed amount of money for a specific term where you receive a predetermined interest rate. You have the option of cashing out at the end of the term, or rolling over the CD for another term. Most institutions don’t allow you to add additional funds before your traditional CD matures.
Bump-up CD – A bump-up CD savings certificate entitles the bearer to take advantage of rising interest rates with a one-time option to ‘bump-up’ the interest rate paid.
Liquid CD – Liquid CDs refers to a certificate of deposit (CD) where the depositor is permitted to take funds out without incurring a penalty. Such Liquid CDs often require a minimum balance to be maintained and have a maximum number of permitted withdrawals.
Zero-coupon CD – A certificate of deposit (CD) that is purchased at a largely discounted rate is a zero-coupon CD. It differs from a traditional CD in that interest payments are not received yearly, but rather as a lump sum at the date of maturity.
Callable CD – A callable certificate of deposit is a time deposit with a bank or financial institution that can be redeemed by the issuer before the maturity date. There are certain restrictions with this type of CD.
Brokered CD – A brokered CD is purchased through a brokerage firm, or from a sales representative, other than a bank.
High-yield CD – High-yield CDs offer better-than-average rates, but often come with strict guidelines.
What CD is best for you?
Certificate of Deposits are generally used to balance investment portfolios and the CD strategy is different for every unique situation. Before you pick a CD, it’s important to calculate how much interest you could earn by the end of your term. Since there is a large variety of CDs, it is generally best to consult with an expert financial advisor to help you determine whether a CD, and what type of CD, makes the most sense for you finances.