There are good reasons to invest in a bank certificate of deposit (CD). If you’re looking for a low-risk method for earning interest, a CD may be the right investment for you. CDs are best suited when you have funds that you’re not going to utilize during a given period of time. Purchasing a CD offers a higher rate of return than a typical savings account or money market account. Money invested on a CD may not be withdrawn before the end period of maturity without incurring a penalty.
CDs are investment instruments that carry a fixed interest rate and are held for a specific length of time. Bank certificates of deposit are usually issued by banks or brokerage firms. As opposed to other market investments such as annuities or mutual funds that carry certain risks due to fluctuations in the stock market. Investing in CDs offer the assurance of earning a return at the end of the maturity period. Like savings accounts, certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC).
The term of a CD may typically range from three months to up to five years. Common terms for CDs are usually from 6 months to one year. Longer term CDs earn higher interest rates. And the greater amount of money you invest, the higher the rate of return, as well. Investing in a CD requires a minimum deposit; however, higher interest rates are offered for larger deposits. Once the CD matures, you may stay with the bank that issued the CD and renew, or reinvest your money at a different financial institution that’s offering higher interest rates to receive the best return.
The advantage of investing in a CD offers you the convenience of knowing in advance the amount of money you will receive in return. A certificate of deposit usually earns more than a savings account. Moreover, in the U.S., a certificate of deposit is insured by the Federal Deposit Insurance Corporation (FDIC). They’re protected against loss by the U.S. government. The returns are minimum compared to other investments, and your money is tied up for as long as your CD investment is maturing, that is to say that you won’t be able to withdraw your funds before the maturity date.
Interests accrued for both savings accounts and certificates of deposit are classified as income. Normally CDs pay interest when the CD reaches maturity. Annual earnings on a certificate of deposit are subject to taxes unless they’re held in a retirement account. An individual retirement account (IRA) can have a CD as part of its portfolio. When a CD forms part of an IRA, the rate of interest earned is tax deferred. When the IRA is a Roth IRA, it is not taxed, provided certain conditions are met.
The traditional CD remains the most common type of CD; however, many financial institutions are offering an array of non-traditional certificates with more flexible capabilities. Liquid CDs offers consumers the chance to withdraw funds from the CD without incurring in penalties. Bump-up CDs offers the option to get the higher rate of a raising rate atmosphere. Some banks offer CDs with special redemption features in the event of the consumer’s death. Moreover, many banks offer variable interest rate CDs based on a tied performance to a particular market index, such as the Dow Jones industrial Average or the S&P 500.
You may want to make sure you understand all the terms before investing in a CD. Make sure that you acquire a CD issued by an FDIC-insured bank. If you purchase a certificate of deposit from a broker, you will have to rely on the broker’s promise of placing your investment into a CD account at an FDIC- insured bank. Review the account agreement to confirm the maturity date, and check if the CD will automatically renew at maturity. Also, you might want to check if the interest rate will change or will continue to be the same interest rate.