7 top tips for choosing the best CD for your money

You need to consider the terms, rates, fees and types of CDs

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Certificates of deposit (CDs) are a type of bank-offered account that gives you a fixed interest rate in exchange for your money staying in the account for a predetermined period of time. CDs can offer interest as high as, or higher than, high-yield savings accounts — though with more potential drawbacks.

They are considered a low-risk investment, more akin to bonds than stocks. However, there are many different types of CDs to choose from, and a number of important factors to consider before investing in one.


Key insights

  • There are 12 types of certificates of deposit, though the most common is the traditional CD.
  • It’s important to pick an interest rate and term that works best for you, as most CDs will offer a fixed rate and will not allow you to withdraw your funds early without imposing a penalty.
  • While CDs themselves are low-risk options to grow your money, you can still suffer heavy losses if your financial institution is not insured.

1. Decide which type of CD suits your goals

Not all CDs are created equal. Here are the different types you’ll find as you’re shopping for your best CD.

  • Traditional: a bank account in which you deposit a certain amount, usually above a set minimum, and receive a fixed interest payment for a predetermined period of time
  • Bump-up: a type of CD that allows you to switch to a higher interest rate during the course of the CD term
  • Step-up: similar to a bump-up CD, but the switch happens automatically instead of manually
  • Brokered: a CD offered by a brokerage account, which generally carries a higher annual percentage yield (APY) and can be sold in the secondary market
  • Callable: a CD that can be redeemed by the bank at any point during the duration of the term, usually to avoid paying out more than market rate should interest rates drop
  • High-yield: a CD that offers a higher yield than other CDs but may require higher initial deposits and longer terms.
  • Jumbo: a CD that requires a high initial deposit, usually around $100,000, and typically pays higher interest rates than traditional CDs
  • No-penalty: a CD that doesn’t impose a penalty for an early withdrawal of funds
  • IRA: a CD that can be bought within your individual retirement account
  • Add-on: a CD that allows you to make additional deposits during the course of the CD term
  • Foreign currency: a type of CD issued in foreign currency, which is highly volatile given the relationship to monetary exchange rates
  • Zero-coupon: a CD that pays out at the very end of the CD term, instead of at periodic intervals

» MORE: CDs vs. savings accounts: Which is right for you?

2. Pick a term length that works for you

The most common CD term lengths are three months, six months, one year, two years, three years and five years. However, the total range can be between a few days and 30 years — providing a wide range of options to choose from.

Many people choose to buy CDs of varying time lengths, a process known as laddering. By laddering CDs, you can take advantage of rising interest rates while still enjoying the stability and predictability offered by CDs.

3. Shop around for the best interest rates

In order to get the best interest rate possible, be sure to shop around. Most online banks will offer CD rates higher than brick-and-mortar banks, though that may not always be the case. The average CD interest rate is between 1.2% and 1.5%, while many online banks will offer rates between 3% and 5%.

Most banks offer CDs that pay simple interest, as opposed to compound interest. Simple interest is an interest payment that accrues on the original principal amountonly, whereas compound interest accrues on top of the interest which has already been paid out on the principal.

For instance, a $1,000 CD that pays 4% simple interest over a four-year term would have an end value of $1,160. However, the same CD that pays 4% but compounds annually would have an end value of $1,169.86.

4. Compare fees and withdrawal penalties

Most banks will structure fees and penalties in the form of interest forfeited. The exact range will vary based on the duration of the CD, though the average is between 90 and 180 days’ worth of interest.

So, if you had an initial deposit of $1,000 and an interest rate of 1%, and the withdrawal penalty was 150 days, your penalty would be $4.11.

Your bank may have its own fees and penalties, so it's important to read the fine print before signing any finalized paperwork.

5. Note the minimum deposit

The minimum deposit may serve as a barrier to entry to a particular CD, so it’s important to take note of it.

Most CDs have a minimum deposit of between $500 and $1,000, though there are some online banks that offer CDs with no minimum deposit.

6. Make sure your bank or credit union is federally insured

Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) insurance help protect your money. Many CDs are insured by either the FDIC or NCUA, which protects you from losses — generally up to $250,000.

If you open a CD at a bank that is not FDIC- or NCUA-insured, you risk losing everything that you deposit into the CD.

7. Know what happens when your CD matures

When your CD matures, the bank will renew it into a new CD by default. You will receive your initial principal, in addition to the interest payments that you received during the duration of your CD term.

If you don’t want the CD to renew, you must manually withdraw the funds yourself, or tell the bank you do not want the CD to renew.

» MORE: How to renew a CD

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FAQ

What are the disadvantages of CDs?

With a CD, your money is locked in and cannot be accessed without incurring some penalty or fee. As such, CDs are not a good option if you think you’ll need access to the money before the term is up.

What is a brokered CD?

Brokered CDs are offered by a brokerage rather than directly from a bank, and can be bought and sold on the secondary market.

Can you add money to a CD?

Unless you buy an add-on CD, you cannot add money to your CD deposit before the term is up.

Do you pay taxes on CD interest?

Yes, the interest earned on CDs is taxed at your marginal income tax rate.

Bottom line

CDs are a great option for someone looking for a low-risk investment with higher yields than they may get from a savings account. But in order to choose the best CD for you, it’s important to remember each of the tips listed above.

Understanding your own goals will help you pick the right type of CD, as well as the ideal time duration and best interest rate. Once you’ve picked, ensure that your investment is held with a reputable and insured custodian so that you’ll have peace of mind throughout the term until the CD matures.

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