Is a CD investment safe?

Certificates of deposit are one of the safest ways to save your money.

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As the cost of living increases, Americans are paying more for many goods and services. This makes saving money safely and smartly more important than ever. For risk-averse people, certificates of deposit (CDs) are a great way to do this and earn a much higher rate of return than with a traditional savings account.

When you open a CD with an FDIC-insured bank, the government guarantees up to $250,000 of your deposits. Plus, traditional CD returns aren’t tied to an index, like the stock market. Instead, the bank pays you a fixed rate of interest.

These features make CDs one of the safest places to store your money.

Key insights

  • When you open a CD with an FDIC-insured bank, your deposits are protected up to $250,000.
  • Traditional CD returns aren’t tied to an index, like the stock market, but are based on fixed interest payments by the bank.
  • The rate you earn on a CD may be as much as 10 to 20 times higher than on a traditional savings account.

What is a certificate of deposit (CD)?

A certificate of deposit (CD) is a financial product that allows you to save your money for a set period (term) and pays a fixed interest rate on your account balance. You can’t access these funds until the term ends without paying a penalty.

If you need to withdraw funds early, you could incur fees as low as $25 or as high as 12 months of interest. The longer the remaining term on the CD, the higher the early withdrawal penalty will be. CDs terms can be as short as one month and as long as five years.

Depending on the CD’s term, the interest rate you earn may be as much as 10 to 20 times higher than with a savings account. CDs with longer terms carry higher interest rates. The interest rate also depends on the state of the economy, with rates rising and falling as economic conditions change.

» MORE: Interest rates and how they work

Are CDs safe?

CDs are one of the safest ways to save money. If you open a CD at an FDIC-insured bank, up to $250,000 of your deposits are guaranteed by the Federal Deposit Insurance Corporation. So, you’ll be able to get your money even if the bank goes out of business.

CDs are a low-risk investment since they provide a guaranteed rate of return.

You’ll also earn a guaranteed rate of return on your deposits. Unlike other investments where earnings are tied to an index, like the stock market, the interest rate you’ll earn on your deposits is fixed for the CD’s entire term. The APY (annual percentage yield) won’t change, and the funds you put in the CD won’t lose value.

When choosing where to open your CD, FDIC-insured online-only banks can be as safe as banks with physical locations. Credit unions offer a product equivalent to a CD, called share certificates, which is equally safe. The National Credit Union Administration (NCUA) offers deposit protection for insured credit unions just like the FDIC does for insured banks.

Additionally, most banks offer two-factor authentication, which adds security to your account and prevents unauthorized access. It’s yet another feature that can keep the money you place in a CD safe.

CDs vs. the stock market

With a CD, your return on investment (ROI) is predetermined, since the account has a fixed term and interest rate. By contrast, the ROI you’ll earn on investments in the stock market varies. When you invest in the stock market, your ROI is tied to how well the companies in your stock portfolio perform and the overall state of the stock market and economy.

While you may earn higher returns on stock market investments, these potential returns carry much greater risk than CDs. Not only can your investments in the stock market lose value, but the returns aren’t guaranteed. CDs carry much less risk, since the amount of money you deposit won’t decrease and the return you’ll earn is fixed.

» MORE: How to buy stock

CDs vs. other savings accounts

When you deposit your funds into a CD, you can’t access the money before the term ends unless you pay an early withdrawal penalty. If you’re setting aside funds you don’t plan to touch, CDs are better than most other savings accounts, since they typically carry higher interest rates.

Savings accounts provide quicker access to your money than CDs.

If you think you’ll need to access the funds sooner, however, it’s better to choose a different type of savings account, like a traditional savings account, high-yield savings account or money market account.

If you don’t plan to touch the funds until you retire, an individual retirement account (IRA) might be your best option. IRAs are better than CDs for retirement savings because you usually won’t pay immediate taxes on the funds you place in an IRA or the interest earnings; rather, taxes are generally deferred until the IRA funds are withdrawn. By contrast, the interest you earn on a CD or other savings account is immediately taxed as ordinary income.

CDs and inflation

A CD’s principal balance increases as you earn interest over the CD’s term. However, the CD could become less valuable if its fixed rate doesn’t match the market. The Federal Reserve adjusts interest rates as part of its monetary policy, but since CD rates are fixed, you might be locked into a much lower-than-market rate.

For example, let’s say you have a CD with a fixed rate of 2% and you could earn 4% on a comparable CD opened today. If the fixed rate on your CD is much less than the current market rate, you might consider if it’s worth paying an early withdrawal penalty to access the funds and use them to open a new CD with a higher rate.

Before you make an early withdrawal, read your deposit account agreement and check with your bank about any penalties. Although early withdrawal penalties could be as little as $25, they could be as much as the equivalent of 12 months of interest on your CD.

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Can you lose money in a CD account?

No, you can’t lose money. You’ll earn a fixed interest rate during the CD’s term. You typically can’t lose the principal balance of the money you place in a CD. Instead, it increases as you earn interest.

However, if you withdraw funds before the CD’s term ends, you may have to pay an early withdrawal fee, which could eat up some of the interest you earned and possibly some of your principal.

Is a CD safer than a savings account?

CDs and savings accounts are equally safe, as your returns are based on interest paid to you by your bank. Plus, if your CD or savings account is with an FDIC-insured bank, the government guarantees up to $250,000 of your deposits. The main differences between these accounts are that CD APYs are typically higher, while you can more easily access funds in a savings account.

What happens to your CD if you don’t withdraw the funds?

When the CD matures, the bank gives you a grace period to decide if you want to renew the CD or withdraw the funds. If you don’t withdraw the funds before the grace period ends, most banks automatically renew your CD for a similar term at current market interest rates.

Are CDs better than investing?

CDs are relatively low-risk, since the principal amount you invest doesn’t decrease and you earn a fixed interest rate for a set term. This can make CDs a better choice than investing in the stock market for people with a low risk tolerance or who only need to invest the funds for a short period.

Funds you invest in the stock market can lose value with changes in individual stock prices, market conditions and the economy. However, if you plan to invest over the long term, you may earn a higher rate of return over time in the stock market despite fluctuations in your portfolio’s value.

Bottom line

Although a CD can be a safe place to store your money, it’s essential to analyze your financial goals before opening an account. For example, you should build an emergency fund you can quickly access before opening a CD. Savings accounts are better for emergency funds.

If you’re saving money for a short- or medium-term goal, like buying a house or going on vacation, a CD may be a better option, since you’ll earn a higher rate.

Remember, you may need to pay an early withdrawal penalty to access your funds before the CD matures, so make sure you won’t need to use the funds before you lock them in. Otherwise, you may forfeit some of your interest earnings.

Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Deposit Insurance Corporation, " National Rates and Rate Caps ." Accessed Feb. 1, 2023.
  2. Federal Deposit Insurance Corporation, " Deposit Insurance ." Accessed Feb. 1, 2023.
  3. IRS, " Traditional IRAs ." Accessed Feb. 13, 2023.
  4. Office of the Comptroller of the Currency, " What are the penalties for withdrawing money early from a certificate of deposit (CD)? " Accessed Feb. 1, 2023.
  5. U.S. Securities and Exchange Commission, " Certificates of Deposit (CDs) ." Accessed Feb. 1, 2023.
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