Certificate of Deposit legal definition of Certificate of Deposit

You can typically get better interest rates than a savings account would provide without the risk of investing in the stock market. While designed for saving, a money market account has some similarities to a checking account. In addition, the interest rate earned can compete with that of certain CDs, but it may depend on your account balance. Ultimately, if you’re looking for quick and easy access to your funds, consider keeping your money in a traditional savings account.

  • Because interest rates vary widely from one financial institution to another, it pays to shop around.
  • It can differ depending on when you make the withdrawal and is based on the interest you would have earned had you left your money in the CD.
  • Or maybe you simply want some portion of your savings invested very conservatively, or you shun the risk and volatility of the stock and bond markets altogether.
  • One way to extend the ladder even further is by rolling the money from a CD that has just matured into a new five-year CD.
  • Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.
  • Although interest rates may be higher than savings accounts and money markets, you’ll want to read the fine print carefully.

Once you make your initial deposit, you won’t be able to deposit any more money. How often that happens depends on your bank or credit union, with some CDs compounding daily and others monthly. You will not, however, be able to receive the interest you’ve earned until your CD matures. Opening a CD with one of the best rates might mean joining a bank or credit union outside of your primary financial institution, such as an online bank. That move can be worth it, especially to get far better rates than you’d get at traditional banks. Unlike savings accounts, CDs generally don’t allow you to make additional deposits.

This is because the rate affects the prime rate, which is the lowest interest rate banks charge their customers. If the prime rate rises, CD rates tend to go up, and vice versa. Also, banks that want to attract new and existing customers may boost their CD rates in order to compete with other financial institutions. Most financial institutions will automatically renew your CD upon maturity.

Are there ways to use CDs but stay flexible?

It’s also best for those who want a safe investment, as a CD offers a guaranteed rate of return for a certain period of time. What’s more, deposits are insured by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). If the financial institution you where have your CD fails, your money is safe (at least up to $250,000).

You’ll be asked for basic information like your address and contact details. You may have to show an ID if you don’t already have an account at that financial institution. Certificates of deposit can be a great way to save money in some circumstances, but they are not right for everyone.

But if you have cash that you want to securely store for a fixed period of time, and want to get a better interest rate than with a regular old bank account, a CD could be perfect for you. A CD ladder is a strategy designed to maximize the interest you earn while minimizing the amount of time your funds are unavailable to you. For example, say that you open five CD accounts, each with a different term in years, from one to five. Then, each year a CD matures, you invest the proceeds into a five-year CD.

Alternatives to a Certificate of Deposit

Do you have a lump sum of money to save for a big purchase in a few years? Or do you have some savings earmarked for investing down the road? The top jumbo CDs (those requiring a minimum deposit of at least $50,000) consistently pay poorer rates than the best CDs that are not marketed as “jumbo” but will take deposits of any size. The top-paying CDs in the country typically pay five to eight times the national average rate, so doing your homework on the best options is a key determinant on how much you can earn.

Best CD Rates

A certificate of deposit, also referred to as a CD, is a time deposit at a bank, credit union, or other financial institution. A certificate of deposit requires that the money cannot be accessed until an agreed upon maturity date. However, if the depositor insists on withdrawing the money before the maturity date, the financial institution will assess a penalty—usually the loss of interest. The responsibility for maintaining the ladder falls on the depositor, not the financial institution. Because the ladder does not depend on the financial institution, depositors are free to distribute a ladder strategy across more than one bank.

How CDs work

Generally, a “window” is allowed after maturity where the CD holder can cash in the CD without penalty. CDs are primarily intended for risk-averse investors seeking a safe investment with returns above that of standard savings accounts but lower than riskier options such as stocks and bonds. If you like the idea of earning more than a fraction of a percent (as with an old school brick-and-mortar bank savings account), a CD might be the right choice. If a certificate of deposit doesn’t make sense for you, here are a few more ways to save at better rates without the time lock.

A certificate of deposit is an account in which you place funds and commit to leaving them in the account for a set period called a term. In turn, the institution pays you a higher interest rate than you’ll find in a typical savings account. A high-yield savings account (HYSA) earns a higher rate of interest than a traditional savings account, but it may not earn as much as a CD. There can be exceptions to this when interest rates go up, whether due to inflation or a healthy economy.


Many HYSAs are online bank accounts, and some financial institutions, such as Quontic, offer other incentives for your depositors, such as earning cash back on debit card purchases. One of the main advantages of a CD is that you’re earning a guaranteed rate of interest for a predetermined amount of time. In addition, the amount the american accounting association on deposit is generally insured, meaning you won’t lose money if your bank fails. However, you may not earn as much interest compared with other types of investments, and the rate you earn may not be competitive if inflation is high. Practically speaking, it is almost impossible to lose money on a CD for two reasons.

What Is a CD (Certificate of Deposit)?

Opening a long-term CD right before a Fed rate hike can hurt your future earnings, while expectations of decreasing rates can signal a good time to lock in a long-term rate. The federal funds rate in turn influences the prime rate, the interest rate that banks charge their most creditworthy customers. The prime rate is generally the fed funds rate +3 percentage points. Anyone who’s been following interest rates or business news in general knows that the Federal Reserve’s rate-setting actions loom large in terms of what savers can earn on their deposits. That’s because the Fed’s decisions can directly affect a bank’s costs. If you like the sound of CDs but want to keep your money accessible, you might consider building a CD ladder.

With a Roth, your contributions are taxed when you make them, but your earnings are tax free, assuming you withdraw them after you are age 59½ and the account has been open for at least five years. A Treasury bill is a type of short-term investment issued by the U.S. However, you can sell a Treasury bill before its maturity date without incurring a penalty. The maximum term of a Treasury bill is 52 weeks; a CD term, on the other hand, can go as long as 10 years. An “early-withdrawal penalty” is what you must pay if you decide to withdraw money before the CD maturity date. The penalty will depend on the stipulations imposed in your CD contract.

In general, and similar to other fixed-interest investments, the economic value of a CD rises when market interest rates fall, and vice versa. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Other than the federal funds rate, the following factors can influence the rate on a certificate of deposit (CD). Early withdrawal fees can be avoided by opting for a no-penalty certificate of deposit (CD), but the interest rate for such instruments is lower, as one might reasonably expect.

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