19 April 4 MINS READ
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CDs are a popular savings instrument for consumers looking for low-risk investments with higher returns than regular bank savings accounts. A certificate of deposit may be a smart place to keep your money if you want to earn a greater rate of interest on your savings while still having the protection of the Federal Deposit Insurance Corporation (FDIC) and avoiding some of the volatility and risks of the stock and bond markets.

Before you take the plunge, read these 6 tips to learn how to choose the best CD for your savings goals.

1. CD Term Length

Certificates of deposit are offered by banks and credit unions with terms, ranging from one month to five years or more. You have two options when your CD matures: you can get your money back, with interest or move the money into a new CD. CDs tend to be a favorite tool of investors who focus on long-term investments. You can typically earn a greater APY with a longer-term CD, depending on how long you are willing to commit your money to be deposited in the CD. In general, the longer the term of your CD, the higher the interest rate.

However, you should be realistic with your goals. If there's a chance you'll need to withdraw some money before the maturity date, don't put all your funds into a five-year CD just because it has the highest interest. If you do, you'll be charged an early withdrawal penalty, which defeats the purpose of the CD in the first place.

Building a CD ladder could be a good way to get long-term income without committing all of your money all at once. Better still, if you expect to need your money in less than a year, you can invest it in a high-yield online savings account instead. Many online savings accounts offer APY rates that are competitive with (or even higher than) CDs.

2. Interest Rates

The Annual Percentage Yield (APY), or the interest rate that you would earn on your money, is another key feature of any CD. With today's low-interest rates, finding a CD account with a strong Annual Percentage Yield is important (APY). Yes, CDs already have the highest APYs when compared to other types of accounts, but CD rates fluctuate based on broader interest rate changes and ongoing competition among financial institutions.

Before you commit to a CD, do your homework and check around for the best APY. Take note that the APYs offered by online banks greatly outnumber those offered by most brick-and-mortar banks.

3. Early Withdrawal Penalty Fees

If you take your money from a CD before the term expires, you will almost always be charged an early withdrawal penalty. While you might not expect to make an early withdrawal, life happens, and unexpected expenses arise that you can't avoid. If you do need to withdraw money from a CD early, it's better to have chosen one with a lower penalty fee.

Read the fine print to find out how much an early withdrawal penalty will cost you before choosing a CD. Early withdrawal penalties vary per bank or credit union, but they are usually calculated depending on the number of days or months the CD has been open. They are typically higher on longer-term CDs.

Even if the penalties are reasonable, having to pay money to get out of a savings account that you expected to use to earn more money is not ideal. This is one other reason why you should do your homework before investing in a CD.

4. Minimum Deposit Requirement

To open an account and begin earning interest, most CDs need a minimum deposit. This deposit varies, often $500 or more. As part of your CD research and comparison shopping, consider your alternatives for minimum deposit amounts before choosing a CD. Some CDs offer a better rate of return on your investments, but they require you to invest a larger sum of money over a longer period.

Unless your CD is an add-on CD, you can only put money into it once at the start of the term (Learn more about the various kinds of CDs). Since you won't be able to make further contributions during the term of your CD, you should consider putting more than the minimum, if you have the money. In general, putting more money into a longer-term CD with a greater interest rate will earn you more money.

5. FDIC Insurance

Check to see if the CD is covered by the Federal Deposit Insurance Corporation (FDIC). Thankfully, it’s not hard to discover good CDs that are FDIC-insured up to the regular $250,000 per account holder (The insurance maximum is increased if you open a joint account CD with your spouse).

This implies that if the bank where you have a CD was to go bankrupt (which is extremely unlikely), the FDIC would cover you and refund you up to the maximum amount, ensuring that you don't lose your money.

6. Tax Implications

If your certificate of deposit is in a taxable account (other than a tax-advantaged retirement savings account), you will owe income taxes on the interest earned on the CD, just as you would on interest earned on a savings account or taxable investment account.

CDs can also be used in tax-advantaged retirement savings accounts, such as an Individual Retirement Account (IRA) if your goal is to earn short-term income from your investments. Using CDs in your IRA, however, has significant disadvantages. Consult a financial professional to determine whether CDs are the best investment option for you, in this case.


There you have it: six tips to consider when choosing the ideal CD account for your savings goals! It's a good idea to analyze your alternatives and understand the possible pros and cons of wherever you decide to put your funds, no matter what your financial goals are or what stage of life you're in. CDs can help you save for a better financial future if you use a rational approach and pay attention to details.

Grow your money with a CD, no matter what the market is saying.