Certificates of Deposit

Certificates of Deposit  

Certificates of deposits, or CDs, are among the safest investments you can make, which explains their relatively low-returns. Like savings accounts, CDs are suitable for cash you don’t need for months or years, but CDs usually pay a slightly higher interest rate. And like savings accounts, they’re FDIC insured up to $250,000.


With a CD, your interest rate, how frequently interest is paid, and the maturity date are all predetermined. Cash out before maturity and you’ll almost always pay a penalty, often severe. (Some banks offer no-penalty CDs, but they tend to come with a lower interest rate.) Hold the CD until maturity, and you’re guaranteed to get back what you put in, plus interest.


When choosing a CD, consider how much money you have, how long you can do without it, and the interest rate you’ll earn. Also consider that you will pay income tax on your interest every year. Or, invest in an Individual Retirement Account (IRA) CD to delay or avoid tax on the interest, depending on the type of IRA and when you take money out. Any other bells and whistles should mesh with your specific needs. Here are some of the most popular types of CDs.


Traditional CD

You receive a fixed interest rate over a specific period of time. When that term ends, you can withdraw your money or roll it into another CD.


Jumbo CD

Good for when you want to park serious money in a safe place. Minimum deposits of $100k or more are common. In exchange, you’ll receive a higher rate of interest.


Bump-Up CD

Should interest rates rise on new CDs, you can swap your lower-rate CD for one with the higher pay-out. Typically, you’re allowed one bump-up during the term of your CD.


Liquid CD

You may withdraw part of your deposit without paying a penalty. But you’ll receive a slightly lower interest rate for the privilege. Still, you’ll likely earn more than if you place your money in a money market account.


Callable CD

The issuing bank can recall your CD after a set period, returning your deposit plus any interest owed. CDs are recalled when interest rates drop significantly below the rate you’re earning. To entice you, banks typically pay a higher interest rate.


Zero-coupon CD

Instead of paying interest directly to you, that money is re-invested, so you earn interest on a higher total deposit. But you’ll owe taxes on the re-invested interest in the year in which it is paid, not when the CD matures.


Brokered CD

Any CD offered by a brokerage. You benefit because brokerages have access to thousands of CDs offered by traditional and online banks. Because they compete nationally for depositors, brokered CDs generally carry a higher rate of interest. But you will pay a fee to buy them.

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