Certificates of Deposit (2024)

FAQs

Are certificates of deposits a good idea? ›

Along with savings accounts and money market accounts, CDs are some of the safest places to keep your money. That's because money held in a CD is insured. So long as you purchase your CD account through an FDIC-insured bank, you're covered in case the bank shuts down or goes out of business.

A CD is a time deposit account, so you're making a commitment to keep your money in the CD for a set length of time. If you want to take money out of your CD before it matures, you'll pay an early withdrawal penalty. At many banks, the early withdrawal penalty is based on the amount of interest you earn in a day.

You can get 6% on a CD by becoming a member of a credit union offering a certificate with this rate. Find out which credit unions have 6% CDs and who's eligible to open these accounts.

Early withdrawal penalty

One major drawback of a CD is that account holders can't easily access their money if an unanticipated need arises. They typically have to pay a penalty for early withdrawals, which can eat up interest and can even result in the loss of principal.

Disadvantages of investing in CDs

The penalty ranges from a minimum of multiple months' worth of interest to more, depending on the bank and term of the CD. If you open a 12-month CD and need to withdraw the money before it reaches the maturity date, you might lose three months' worth of interest that you earned.

That all said, here's how much a $1,000 CD will make in a year, based on four possible interest rate scenarios: At 6.00%: $60 (for a total of $1,060 total after one year) At 5.75%: $57.50 (for a total of $1,057.50 total after one year)

Depending on the bank, a $5,000 CD deposit will make around $25 to $275 in interest after one year.

Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

Why should you put $15000 into a 1 year CD now? ›

In summary, a certificate of deposit gives you steady and safe returns. Investing $15,000 in a CD could lead to substantial gains, regardless of the CD's length. However, make sure you won't need that money while the CD is active because withdrawing early usually incurs hefty penalties.

As of August 2024, no banks are offering 7% interest rates on savings accounts. Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.

While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.

While CDs can provide some guaranteed returns over time and some level of security, they're not likely to provide you the returns needed to build wealth for retirement over time. Instead, it might make more sense to build wealth with other assets and only use CDs for a portion of your portfolio.

Typically, jumbo CDs require a minimum deposit of $100,000, though some banks and credit unions offer jumbo certificates with minimum deposits as low as $50,000.

The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.

While CDs can provide some guaranteed returns over time and some level of security, they're not likely to provide you the returns needed to build wealth for retirement over time. Instead, it might make more sense to build wealth with other assets and only use CDs for a portion of your portfolio.

The cons of CDs

With a savings account, the money is easily accessible in case of a financial emergency or a change in spending priorities. With CDs, you typically can't withdraw the money whenever you want—at least not without paying a penalty.

The best CD rates remain around 5% annual percentage yields for six-month through one-year terms. But more short-term rates have dropped below 5% since the start of 2024, according to a NerdWallet analysis. The best CD rates for terms of three years or longer tend to be closer to 4% APY.