Certificates of Deposit

Of the various types of investment vehicles available, certificates of deposit (CDs) are accounts that require you to invest your money for a specific time period. They are available from most financial institutions such as banks. Like bank savings accounts, they are guaranteed by the federal government through the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account, with certain conditions.

CDs usually have terms that range from three months to five years but they can be shorter or longer in some cases. There is almost always a minimum amount that is required to open one of these accounts, usually at least $500. Generally, your account will earn interest at the same rate for the entire time period you choose. When the CD term is over, you can withdraw your principal and the interest earned or you can roll over your CD, which means the money is reinvested in a CD for the same term at the prevailing interest rate.

Early withdrawal penalties. Some CDs are set up to automatically roll over. If this is the case for any CDs you invest in, be sure to keep track of the end of term dates in case you want to withdraw your funds to use them or invest them in something else. Once the CD renews, even if it's automatically, you'll be subject to an early withdrawal penalty if you wish to close the account.

A recent development in the CD area is the so-called "no-penalty" CD that permits funds to be withdrawn without penalty at any time. As you might expect, the rate of interest on a no-penalty CD is lower than on a conventional CD. However, it's likely to be somewhat higher than the rate on a savings or money market account.

Financial Calculators Use this Certificate of Deposit Calculator to help you find out how much interest you can earn on a Certificate of Deposit (CD). Just enter a few pieces of information and we will calculate your Annual Percentage Yield (APY) and ending balance. Click on the "View Report" button to see a detailed schedule of your CD's balance and interest earned.

If you need or choose to withdraw money out of your CD before the term you've agreed to ends, you will incur an early withdrawal penalty, which can be substantial.

Should you invest in CDs? Is a CD the right type investment for you? The first factor you should consider is the interest rate. If you're looking for a long-term, safe investment, you should only "lock in" at a time when interest rates are relatively high. You don't want to be stuck with a low interest rate for a long period of time and the inability to move your money elsewhere if rates go up.

If CD rates are low, they generally will still be higher than rates for saving accounts. So you may be able to invest that money earmarked for such quick access in a short-term CD, but for no more than three months. By doing this, you'll have access to your funds in an emergency, but you may be able to earn a bit more interest than in a traditional savings account.

Tip For most people who are not retired, a CD is an alternative to a traditional savings account to keep funds that they may need relatively quick access to with only inconvenience rather than risk added. An added benefit of CDs is that you may be less quick to withdraw from a CD than a traditional savings account because early withdrawal incurs penalties. If you know that you need this built-in safeguard, consider a CD over a savings account for money you aren't investing for long-term purposes.

If the interest rates are high, does that mean you should use CDs as investment vehicles and lock in a larger sum at higher interest rates? The answer to this depends on your age and stage in life. If CDs have rates on the higher side, it's an economic rule that other, riskier investment vehicles, such as mutual funds and stocks are doing even better. If you're on the younger side, and can afford to take some risk, your chances of reaching your investment goals are much better with an investment vehicle with a higher return.

Conversely, if you're nearing retirement or are retired, you may not be able to take any risks with your investment principal and consider investment safety and stability your number one priority. A CD may be a good investment for you, particularly if your principal is large enough at this point to provide sizeable results when coupled with a favorable interest rate.

Interest earned on CDs is considered income for tax purposes.