Certificates of deposit (CDs) could be a good investment option if you have a large sum of cash and a short-term savings goal. These federally insured, low-risk investments offer a predictable fixed rate of return and allow you to bypass broker commissions by investing directly with a bank or credit union.
There are two main types of certificates of deposit: high-yield jumbo CDs and regular CDs. Both reward investors for depositing funds into an account for a set period of time. Since early withdrawal penalties may apply, CDs may work best when aligned with specific time-based financial goals, such as saving for a home improvement project or a wedding.
While differences between the two types of CDs can vary by financial institution or brokerage firm, highlighting a few key points may help you decide which one might make the most sense for your particular financial situation.
Minimum Deposit Requirements
In exchange for higher rates of return when compared to standard savings accounts, investors must commit to making a deposit and leaving it untouched for the CD’s term length. Some regular CDs require no minimum deposit requirements, while high-yield jumbo CDs typically require a minimum opening deposit of $100,000 or more, depending on the institution.
- How much money do you have available for a deposit?
- Since early withdrawal penalties may apply, do you have access to liquid funds in another account if you need to pay for an emergency expense?
- Does the institution allow you to make additional deposits?
- What is the interest compounding frequency? Daily? Annually?
Length of Deposit Term
Generally, the longer you commit to leaving the funds untouched, the higher the dividend rate of the CD. Terms may range from three months to five years. For example, a five-year CD is likely to offer a higher rate than a six-month CD. Investors choose the deposit terms at the time of deposit.
Additional Considerations:
- When will you need to access the deposit?
- Do you have a savings goal?
- What are the potential early withdrawal fees? Can you find lower fees at another institution?
- Does the CD include an automatic renewal? Can you opt out of it?
Interest Rate Return
One of the main appeals of CD investments is that they offer a guaranteed rate of return. The interest rate assigned to the certificate doesn’t change during the investment term. Since high-yield jumbo CDs require more substantial deposits than regular CDs, investors often receive a higher interest rate on them.
Additional Considerations:
- How fast do you need your money to grow?
- Do you expect the rate of return to keep up with inflation? If not, does the investment still make sense for your financial goals?
- Is there a bump-up option that allows the account holder at least one CD rate increase during the term without penalty?
- Have you compared rates at your institution against those offered by online financial institutions?
- Which financial institutions are offering bonus rates or special promotions on CD deposits?
CD Loan Options
Some financial institutions let account holders use CDs as loan collateral. A CD secured loan allows borrowers access to funds while avoiding early withdrawal penalties. Loan amounts usually mirror CD deposit amounts and may offer lower interest rates than other loan products. Similar to other types of secured loans, borrowers are typically seeking to build or rebuild their credit.
Certificates of deposit can offer a safe alternative to investing in stocks and bonds. Whether you decide to purchase a CD from a bank, credit union, or brokerage firm, pay attention to insurance limits. Generally, both the FDIC and the NCUA insure deposits up to $250,000 per depositor. For example, if you have multiple deposit accounts with an online financial institution with total balances exceeding the coverage threshold, you may be holding uninsured deposits. Review this How Are My Deposit Accounts Insured by the FDIC? tool for additional guidance.
As with other investments, earnings may be taxed as interest income. You may want to speak with a qualified tax professional to confirm how CD investing might affect your income tax liability.
Tracy Scott is a freelance writer who specializes in personal finance and higher education. As a contributor for Credit One Bank, she has combined her expertise in these two areas and managing credit to create informative, engaging content for readers. Her reading list always includes a seemingly odd mix of financial literacy articles and sweet romance novels. She holds a BA in Psychology from the University of Texas at Austin and has a background in higher education regulatory compliance.
