A certificate of deposit (CD) is a type of savings account
that requires you to deposit money for a predefined period of time in return for higher interest rates than most other deposit accounts will provide. CD rates increase when you select a longer term of investment. In the current financial environment, interest rates on all deposit accounts are quite low, which makes it more important than ever to compare the 725 certificates of deposit (CDs)
in our database. The more
Expert’s Answers section below has tips for how to make the most of your investment in CDs. less
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- For Account owners with Accounts established on or before April 15, 2016 (“Legacy Account Owner”), the maximum amount of money on deposit for all of your individual and joint deposit Accounts combined may not exceed $3,000,000 (not including interest earned and credited but not withdrawn) per Account owner, with a $1,000,000 (not including interest earned and credited but not withdrawn) per Account maximum.
- For Account owners solely holding Accounts opened after April 15, 2016, the maximum amount of money on deposit for all of your individual Accounts combined may not exceed $250,000 (including interest earned and credited but not withdrawn) per Account owner and may not exceed $250,000 (including interest earned and credited but not withdrawn) per Account owner for joint Accounts, for a combined maximum Account balance of $500,000 (including interest earned and credited but not withdrawn) per Account owner.
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What Is a CD?
Like savings and money market accounts, certificates of deposit—more commonly known as CDs—are deposit accounts that offer a safe place for consumers to stow their cash. That safety comes in the form of federal deposit insurance, either through the FDIC (for bank CDs) or the NCUA (for credit union CDs). So if your bank or credit union fails, you’ll get your money back, up to a standard limit of $250,000 per account holder, per institution. Coverage includes both the account principal and any interest that has accrued at the time of the failure.
Interest rates and yields can be higher for CDs than for savings or money market accounts. But this increased earnings potential comes with decreased liquidity. When you open a CD, you put in a fixed amount of money and commit to keeping it there for a fixed period of time, called the maturity. CD maturities can be as short as three months or as long as five years—sometimes even longer. If you withdraw your money before the CD reaches maturity, you are subject to an early withdrawal penalty fee.
As a rule, the longer the maturity of your CD, the higher your interest rate should be. That’s because banks put depositors’ money to work, and they’re willing to reward you for letting them use it for a longer period of time. By the same token, customers making larger deposits can expect a higher interest rate than those making smaller deposits. The best CD rates are typically reserved for the longest-term jumbo CDs, that is, CDs with a balance of $100,000 or more.
How Can You Get the Most from Your CDs?
CDs come in a plethora of varieties, and they require more attention than other types of savings accounts. To ensure that you reap all the benefits of your CDs—and escape all the hazards—consider the following suggestions:
Beware of CDs with maturities longer than five years. Seven- and ten-year CDs are just as safe as shorter-term CDs, and their yields will be a bit higher. However, those yields are unlikely to be high enough to warrant tying up your money for such a long period of time. In other words, if you don’t need access to your funds for more than five years, your risk tolerance should be high enough to merit a riskier investment with a greater earnings potential than what the highest-yielding CD can offer.
Stay alert when your CD is about to mature. When the term of your CD comes to an end, you’ll have the option of either cashing out or opening up a new CD. Many banks have an automatic reinvestment plan in place, and if you don’t cash out within a specific window of say, 10-15 days, you might find your money tied up for another five years or more. If you do opt to roll over your CD into a new account, make sure you understand the new terms and approve of the new interest rate.
Double-check the details. Because there so many variations and options with CDs, it’s especially important to read the fine print and ask questions.
Is your CD federally insured? If you’re opening your CD at an FDIC-insured bank or an NCUA-insured credit union, you can assume that you’re covered. However, if you’re buying a “brokered CD” through an agency, you’ll want to confirm insurance coverage.
Will the interest be compounded daily, monthly, quarterly, or annually? The compounding schedule will make a big difference to your yield.
What are the penalties for early withdrawal? In some circumstances, such penalties could cut into your principal, which defeats the whole purpose of investing in an ultra-safe deposit account. You’ll want to plan accordingly.
Try building a CD ladder. The main dilemma with CDs is that you have to sacrifice liquidity to increase yield. One way to compromise between yield and liquidity is to build a CD ladder.
The classic example of a CD ladder is the five-rung, five-year plan. Let’s say you have $10,000 to invest. You’ll get the best deal by putting it into a 5-year CD, but you might not feel safe giving up access to all of that money for a full five years. So you divide the money into five chunks of $2000 each, and invest in a 1-year CD, a 2-year CD, a 3-year CD, a 4-year CD, and a 5-year CD.
As each successive CD matures, you will have the option of either withdrawing the money or rolling it over into a brand new 5-year CD. And each year, you will have access to $2,000 of your savings, plus compounded interest, without any penalty. If you roll all of your accounts into 5-year CDs as they mature, within five years they will all be earning at the top rate, even though one of them will be maturing every 12 months.
What Are the Pros and Cons of CDs?
|As federally-insured deposit accounts, CDs offer the highest level of safety.
||Low risk means low reward. Many other investments have higher earnings potential.
|CDs can offer higher interest rates than savings or money market accounts.
||Account holders can’t access their funds for a specified period of time without a penalty.
|CDs earn compound interest. That means you’ll be earning interest on your interest.
||Not all CDs compound interest on the same schedule. It might be daily, monthly, quarterly, or annually. Before investing, find out which it will be.
|Creating a CD ladder can help maximize both yield and liquidity.
||If you’re not paying attention when your CD reaches maturity, your bank may roll it over into a new account with terms you don’t want.
|CDs come in numerous varieties. Non-traditional CDs might offer such features as variable rates and increased liquidity.
||Special features require special vigilance. Make sure you understand the fine print before committing your money for an extended period of time.