A certificate of deposit is low-risk time deposit that usually earns higher interest than a regular savings account earns. But when you open a CD, you commit to leaving your money in the account until the CD hits its maturity date, which can be anywhere from a few months to several years. If you take your money out early, you could pay a penalty.
CDs appeal to investors who won’t need their money before the end of the term. Keep reading to learn about CDs and decide if CDs are a good addition to your investment portfolio.
Why You Should Open a CD
CDs can be great investments if you can leave your money untouched until the maturity date — plus, they’re low-risk. If you shop around, you can find decent interest rates, even on CDs with shorter terms. EverBank offers a 12-month CD with a 1.56% APY on a deposit of $5,000 or more, as of Aug. 8, 2017.
CDs are considered a safe investment because in addition to being FDIC-insured, they offer a fixed rate of return. And typically, the longer the term, the higher the CD interest rates. For instance, Synchrony Bank has a 60-month high-yield CD that pays 2.30% APY if you deposit $2,000 to $24,999, and that rate jumps to 2.35% APY if you invest $25,000 or more, as of Aug. 8, 2017.
The ideal situation for a CD investor is to have an emergency fund to draw from in case something unexpected comes up. That way, you avoid dipping into your CD and paying a penalty for early withdrawal.
When you buy a CD, you don’t have to worry about tax rates. You pay taxes on the interest you’ve earned, but it’s treated as personal income, not capital gains, so the interest is taxed at your usual rate.
Find Out: 10 Best Credit Unions for CD Rates
Maximize Your CD Investments
While shopping for a CD, look into “bump up” products that let you take advantage of one interest rate increase during the term. If you think you might have to withdraw your funds before the CD matures, consider a no-penalty CD. Ally Bank offers a no-penalty CD that enables you to withdraw funds during the first six days after you make your deposit, and keep any interest you earned.
Another way to maximize your CDs is to build a CD ladder. CD laddering involves investing in CDs that mature at different times, which gives you periodic, penalty-free access to your funds and allows the money in the longer-term CDs to keep earning. For instance, if you have $2,500 to invest, consider investing $500 in five CDs with maturities of 12, 24, 36, 48 and 60 months. As each CD matures, open a new 60-month one. After five years you’ll have all 60-month-term CDs, with one maturing each year.
Keep Reading: How CD Laddering Works