Types of CD’s

There are several types of CD accounts that you can choose from: standard, brokered, and specialty. Each has its own unique benefits so it’s important to know the ins and outs before choosing the best one for you. 

Standard CDs: Allow you to deposit money for a set period and earn interest over the course of its term. Terms can last anywhere from a week all the way to 10 years! 

Specialty CDs: Similar to standard CDs but offer more features. Some of these specialty CDs include features like higher interest rates for a higher deposit amount (jumbo CDs), no fees for withdrawing money before maturity (no-penalty CDs), making extra deposits during the term (add-on CDs), and even getting better interest rates during your term (bump-up CDs).

Brokered CDs: Generally have higher requirements than a specialty or standard CD. Most times these CDs need an initial minimum deposit of over $10,000. As its name states, these accounts are handled by a brokerage instead of a credit union or bank.

Pros and Cons of CDs

Here are the pros and cons of opening a certificate of deposit account.

Pros

1. Fixed Interest Rates- Knowing exactly how much interest you will earn when you invest in a CD. There isn’t any way the interest rates will fluctuate. 

2. Short-term Investment: CD terms range so drastically that you can choose what works best for you based on how long you want your investment terms for.

3. Low Risk: Most CDs are low-risk investment options because they are FDIC (Federal Deposit Insurance Corporation) insured. Also, your interest rates are secured for the length of your investment. 

4. Flexibility: CDs offer a wide range of options, such as different term lengths, interest rate structure, and penalty for withdrawal. This flexibility allows you to select a CD that best fits your needs.

Cons

1. Limited Liquidity: CDs are not very liquid investments. Once you invest your money you cannot withdraw it until the CD matures. Withdrawing your money before the CD matures can result in penalties. These penalties can add up to about 3-6 months of interest, sometimes even more.

2. Limited Returns: Interest rates that CDs offer are usually lower than the average stock market return. If you are willing to take more risks with your investments, you might want to consider investing your money in other investment options that offer higher returns.

3. Inflation Risk: Inflation can reduce the value of your investment and make it less valuable than at the time of investment. Since your money is locked until maturity, it’s important to take inflation into account when investing in a CD.Advantages of Certificates of Deposit. 

How to pick the right CD?

There are several factors you should consider when looking to open a CD. First and foremost you should look at the different interest rates that are available and compare them to other CD rates. 

The next thing you should think about is the term length and how long you’re willing to tie your money up for. 

Lastly, take into consideration what the penalties are for early withdrawals. It's crucial to understand all the terms and conditions before investing your money to avoid any unpleasant surprises.

FAQ’s

Are Certificates of Deposit Worth It?

The simple answer is: it depends on your needs. If you are in a financial situation that allows you to put money aside and not touch it, then they are absolutely worth it.

When comparing them to a high yield savings account, CDs are a great alternative since the interest rates are generally higher. You should always track your money when you think about investing your hard earned dollars. Hiatus is a perfect financial app that will allow you to do so and is easy to use!

Is It Smart To Open A CD Right Now?

Many people have been able to find that CDs have quite high Interest rates currently. If you have some extra cash that you want to invest, opening a CD could be a smart short term play.

Is Interest From CDs taxable?

Yes, the interest you make on CDs is taxable by the IRS. Your bank or financial institution should provide you with the proper forms that shows how much interest you made from your investment in that particular tax year.