If you want to save your money, consider a Certificate of Deposit (CD) account. CDs are gaining popularity due to their benefits. They offer a higher, fixed interest rate in return for committing your funds for a set period. Here’s what you need to know about selecting the right CD for you.

Is a CD the Best Savings Option for You?

The first step is to determine if a CD is the right choice for your savings. CDs typically provide a higher interest rate compared to standard savings accounts and come with FDIC insurance, ensuring your money is protected even if the bank or credit union fails.

However, if you find it challenging to lock your money away for a set period, a savings account or money market account might be a better fit, as they provide instant access to your funds. Additionally, CDs typically do not allow regular deposits or easy adjustments to a higher interest rate if rates increase. If these factors are important to you, exploring other savings options might be more suitable.

Once you’ve decided on a CD, the next step is to select the best one for your needs. Most banks and credit unions offer a variety of CDs, so it’s crucial to research and compare rates and terms thoroughly to make an informed choice.

Key Factors to Consider When Choosing a CD

Before you begin comparing CDs, consider how much you want to save and the duration for which you’ll lock in your funds. Many CDs offer tiered interest rates, so you may need to invest a specific amount to secure the highest rate. While $25,000 is a common threshold for higher rates, you can often access competitive rates with as little as $1,000.

CD Terms

Generally, longer savings terms come with higher interest rates, so opting for CDs with longer durations can be beneficial. While terms can extend up to ten years, one-year, three-year, and five-year CDs are more common. However, be mindful of early withdrawal penalties. If you can’t commit to a long term and end up withdrawing your funds early, the penalties could outweigh the benefits of a higher interest rate, potentially making a shorter-term CD with annual rollovers a better option.

Don’t overlook unconventional terms when choosing a CD. Some banks and credit unions offer unique term lengths, such as 17 or 13 months, as promotional tactics or special anniversary offers. These non-standard terms can often come with more attractive rates, so be sure to keep an eye out for them.

Some financial advisors suggest using a CD laddering strategy. This involves splitting your investment into several CDs with varying terms. For example, you might invest one portion in a one-year CD, another in a two-year CD, and continue up to a five-year CD. As each CD matures, you invest the funds into a new five-year CD. This approach allows you to benefit from the higher rates of long-term CDs while maintaining access to a portion of your money every 12 months, providing liquidity if you need cash before the full term ends.

Interest

Naturally, you’ll want to secure the highest interest rate available. CD interest rates can vary significantly between banks and credit unions, so thorough research is essential. Online CDs often offer higher rates than those provided by traditional banks and credit unions. Additionally, some banks may offer better rates to existing customers.

Penalties for Early Withdrawal

Even if you’re confident that you won’t need to access your CD funds before the term ends, it’s important to compare early withdrawal penalties. Unexpected circumstances might arise, and having a clear understanding of the penalties for cashing in a CD early can help you make a more informed decision.

Most banks and credit unions impose early withdrawal penalties based on a specific number of months’ interest or a fixed percentage. If you’ve just opened the CD and haven’t accrued much interest yet, these penalties could mean you might not even get back your original deposit. Therefore, it’s crucial to compare early withdrawal penalties before choosing a CD. Some CDs offer the flexibility of no early withdrawal penalties, but typically, they come with lower interest rates.

Maturity Default

Another key consideration when selecting a CD is understanding what happens when it matures. Typically, you will receive notification from the bank or credit union a few months before maturity, asking how you would like to handle the funds. Generally, your options will include:

1. Roll Over the CD: You can choose to roll over your CD into a new one with the same bank or credit union. The institution will typically suggest a similar CD term, such as another 12-month CD. However, you can request to transfer your funds into a new CD with a different term, whether it’s longer or shorter.
2. Transfer to a New Account: You can opt to transfer the funds from your maturing CD into a different type of account at the same bank or credit union, such as a standard savings account, checking account, or money market account.
3. Withdraw Your Savings: You can choose to withdraw the funds in full. The bank or credit union can transfer the money electronically to another bank account or mail you a paper check. You can then use or invest the money as you see fit.

If you missed the maturity date and fail to provide instructions for handling your funds, the bank or credit union will follow a default procedure. Typically, this involves rolling over the amount into a new CD, meaning the funds will be committed for another term unless you incur early withdrawal penalties.

Special CD Types

In addition to standard CDs, there are specialty CDs with unique features and terms. Here are some common CD types to consider:

1. IRA CDs are designed to be part of an Individual Retirement Account (IRA), providing tax advantages and allowing you to maximize your IRA contributions. Some financial institutions offer specialized IRA CDs, while others permit you to designate any standard CD as part of your IRA.
2. Bump-up CDs, also known as raise-your-rate CDs, allow you to increase your interest rate to a higher level once, or occasionally twice, during the term. They are a great choice if you anticipate that interest rates may rise but still want the stability of a fixed rate.
3. Jumbo CDs are standard CDs that offer higher interest rates in exchange for a significantly larger minimum deposit. While there’s no set minimum for Jumbo CDs, most banks require a deposit of $50,000 or more.
4. Add-on CDs offer the flexibility to make additional deposits after opening the CD. Some banks and credit unions allow you to add funds as often as you like, while others limit the number of additional deposits to a specific number per month, quarter, or throughout the term.

Compare CDs to Find the Best Return for Your Money

Choosing the right CD can be challenging, but by carefully considering your goals and comparing rates, terms, and conditions from various options online, you can find the CD that best suits your needs.