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Everything You Wanted to Know About CD Accounts but Were Too Afraid to Ask

Nadav ShemerByNadav ShemerMar. 01, 2020
Which Type of CD is Best For You?
Tired of the low interest rates offered on savings accounts? Worried about the risks associated with investing in stocks or bonds? There is a middle ground: a certificate of deposit (CD account), a product where you lock your money in for a pre-agreed period of time and get rewarded with a superior interest rate.

What is a CD?

Most banks, credit unions, and financial institutions offer certificates of deposit, although each one sets its own CD rates. Like savings accounts, CD interest rates fluctuate. The difference between a certificate of deposit and a regular savings or checking account is that a CD account gives you a guaranteed interest rate for the duration of your term. If you open a 12-month or 24-month CD, your interest rate stays the same for the entire 12 or 24 months.

There are 2 ways to open a CD. The first option is to go directly through a bank or financial institution, which is what most people do. The second option is a brokered CD, which is the same as a bank CD but with a brokerage firm acting as the middleman. Direct CDs offer better rates but brokered CDs offer greater convenience.

Pros of Opening a Certificate of Deposit

If you have a decent amount of money in your bank account and you are confident you won’t need it in the near-term, then you may want to consider a CD account.

  • The best CD rates are better than the best savings and money market accounts
  • CDs give you a guaranteed rate of return, making them a safer option than stocks and bonds
  • Although you agree to lock yourself into a term, you can open your CD early if you’re willing to pay the penalty (typically 30-60 days’ interest).
  • CD terms range from 3 months to 10 years
  • Like savings accounts, CD funds are federally insured if opened with an FDIC bank or NCUA credit union

Cons of Opening a Certificate of Deposit

Obviously, CDs aren’t for everyone. Here are some reasons to think carefully before opening a certificate of deposit.

  • CD accounts typically require a minimum opening balance, starting at $1,000 and rising to 5 to 6-figure balances for the best CD rates.
  • There is a waiting period for early withdrawals, so your CD funds can’t be relied upon for emergency expenses.
  • CD rates aren’t as good as the potential rewards from investing in stocks, bonds, or property (although the risks are certainly lower)
  • If interest rates rise during your CD term, you miss out

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Types of CD Savings Accounts

The traditional certificate of deposit is the best-known and most popular type of CD among consumers, but there are actually many different types. Here are some of the most common specialty CDs:

  • Bump-up CD. Also known as raise-your-rate CDs, these offer the depositor the option of upgrading to a higher rate once during the term. Let’s say you open a 5-year CD and rates rise during this period. With a bump-up CD, you get the option of accessing the higher rate one time only. An alternative type of bump-up CD is the step-up CD, which automatically increases your rate (if rates rise during the term) at predetermined intervals.
  • Add-on CD. With a traditional CD, you lock in your initial deposit for the entire term. An add-on CD lets you make additional deposits during the term. The number of deposits you can make into an add-on CD varies, so always check the rules first.
  • Liquid CD. Also known as a no-penalty CD, this is a certificate of deposit that lets you make an early withdrawal without having to pay a penalty. Liquid CDs offer more convenience than traditional CDs but rates are usually lower.
  • Jumbo CD. As the name suggests, a jumbo CD is a CD requiring a larger deposit than a traditional CD. The minimum initial deposit is typically $100,000 or more. Jumbo CDs often pay superior interest rates, but this isn’t always the case. As with any financial product, read the fine print before opening.
  • IRA CD. An individual retirement account, or IRA, is a tax-advantaged investing tool that individuals use to save for retirement. An IRA CD is an IRA where you invest in CDs. IRAs are an attractive option for anyone wanting to invest a portion of their retirement savings in a no-risk, fixed-interest account.
  • Callable CD. This is a certificate of deposit where the bank has the right to close the CD at any time. If the bank closes the CD, you receive all the interest earned up to that point without having to pay any penalties. Callable CDs typically offer an interest rate premium over traditional CDs. However, you risk having it closed early and missing out on the full amount.

Deciding Which Type of CD is Best for You

Deciding which CD account is best for you is like deciding between a CD vs savings account vs money market vs stocks. Ultimately, the answer depends on how money you wish to invest, how much risk you’re willing to accept, and how long you feel you’re able to lock the money away. If you choose a CD, it’s important to carefully consider the length of the term (ranging from 3 months to 10 years) and to compare different banks and credit unions. CD rates can vary considerably, so shopping around is key to finding the best deals.

Nadav ShemerByNadav ShemerNov. 27, 2019
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.