At first glance, CDs offer a pretty standard proposition: deposit your money for a given amount of time in exchange for a fixed rate of return. Then, sit back and let interest accrue on your principal until the CD reaches maturity—or face a penalty for early withdrawal.
But not every CD, or certificate of deposit, is created equally.
There are several variations of the standard CD formula. Especially in a time when CD interest rates aren’t as attractive as they once were, it’s important to do your research before deciding to add a CD to your savings strategy.
Before locking down your cash, you’ll want to figure out the CD type that’s best for your financial goals, savings strategy, and even the broader economic environment. Here are a few to consider:
You can open a traditional CD at just about any bank, credit union, or other financial institution. Upon account opening, your money is guaranteed to grow at a fixed rate throughout its agreed-upon term, as long as you don’t withdraw before it reaches maturity. In that case, you’ll incur a penalty for early withdrawal.
This is the foundation upon which other CD types are built, often with just a few differences that may better suit your individual goals. CDs are considered among the safest places to store your money while earning interest, and are FDIC-insured.
“The best case for these are for people who want to set away money with some kind of defined time frame,” says Mark Wilson, CFP, founder and president of MILE Wealth Management in Irvine, California. “For example, if I want to buy a house in two years, a two-year CD might be a good option for that. It’s not so far away that you’d want to invest in the stock market or something more risky, but you also don’t need to have that pure liquidity.”
If you’re looking to add CDs to your savings strategy, a standard CD with a solid interest rate may work for you. Always compare CD rates with different banks (and consider basic high-yield savings accounts) before deciding where to lock up your cash.
For Access to Your Cash: No-Penalty CDs
If the potential for extra interest is appealing, but you’re wary of restrictive CD term lengths, no-penalty, or liquid, CDs offer a happy medium.
Generally, withdrawing from your CD before it reaches maturity will result in a penalty, usually a fee or any interest earned up to that point. With a no-penalty CD, you can withdraw your money anytime at no cost. Some restrictions may still apply, such as not allowing partial withdrawals or requiring an initial waiting period before withdrawal is allowed.
In exchange for more liquidity, no-penalty CDs tend to offer lower interest rates than other CD options, or require higher minimum deposits upon opening, though this may be less of a concern today given low rates throughout the market.
You should keep your emergency fund in highly liquid high-yield savings or money market accounts, but for any additional savings, no-penalty CDs offer a good alternative.
For the Optimist: Bump-Up and Step-Up CDs
Bump-up and step-up CDs are similar in that they allow you to maximize interest in a rising rate environment.
Because initial interest rates on these CDs are often lower than you’ll find through other CD types, you should be confident that rates will rise over your CD’s term before opening. Here’s how it works:
Bump-up CDs require a bit of tracking on your end; you can request your CD be bumped up to the rate your bank is currently offering anytime before it reaches maturity. Typically, you can request the rate change only once over the course of your CD’s term. In a rising interest rate environment, this can be a great way to ensure you keep pace with top rates, as long as you stay on top of any moves by your bank.
Step-up CDs also work best when rates are rising, but with this CD type, the bank can automatically increase your CD’s rate at certain intervals, usually on a fixed schedule.
Neither of these CDs offer the best returns when rates are falling or stagnant, but when rates do begin to climb, they can be a great way to ensure maximum returns over your CD’s term.
For the (Light) Risk-Taker: Callable CDs
Typically, CDs are smart options for any savings you don’t want to risk in an account containing more volatile investment options. But if you’re willing to take a bit more risk than standard CDs present, you could potentially reap the benefits with a callable CD.
When you open a callable CD, your bank has the option to “call” your account at any time before it reaches maturity. If the CD is called, you’ll receive your principal plus any interest already earned, but forfeit potential interest for the remaining term period.
Your CD is more likely to be called when rates are falling, not when they go up. That means that when you reinvest the money returned to you, it’ll probably be at a lower rate. In exchange for the additional risk, though, callable CDs usually offer higher interest rates upfront.
For the Investor: Brokered CDs
“They basically tap into the world market of different banks and institutions that are looking to get your cash deposits in exchange for interest,” says Robert Farrington, founder of TheCollegeInvestor, a blog dedicated to helping consumers build wealth and pay down student debt. “Your local bank or credit union may have limited options, but when you go through a brokered CD, there are hundreds and thousands of them out there.”
Brokered CDs have the potential to earn higher interest than traditional CDs, but they also come with more risk. These CDs can be bought and sold, so if you decide to pull your cash out before your CD matures, you may risk losing your earnings or even principal in the sale, rather than incurring a penalty.
Brokerage fees can also eat away at your earnings, and you’ll want to ensure your brokered CDs are FDIC-insured. Always work with a broker you trust and read the fine print of your account agreement.
For the Super-Saver: Jumbo CDs
If you have a large sum of cash on hand that you know you won’t need for a set period of time, consider parking it in a jumbo CD.
These CDs are designed for principal deposits of more than $100,000 and traditionally offer higher interest in exchange for your higher deposit amount. With the emergence of online banks and other banking competitors, though, you can often find comparable rates on CDs not advertised as “jumbo” and with lower minimum requirements. Compare accounts to determine which is best for you before storing your cash in one place, especially if it’s a large deposit.
Also keep in mind that deposits at a single financial institution are only insured by the FDIC up to $250,000. If you’re looking to stash more than that within CDs, consider multiple accounts at different FDIC-insured banks to retain coverage.
For the Habitual Contributor: Add-On CDs
One drawback of traditional CDs is the initial minimum deposit often required to open an account: $1,000 or $5,000 in cash upfront can be a steep barrier to entry for savers.
Add-on CDs, however, allow multiple contributions to your CD over its term, so you can increase your principal in addition to interest as the CD approaches maturity. This type of CD may also be a great option if you’re expecting a windfall in the future, such as a settlement or a bonus at work.
Look out for the number of additional deposits you can make over your CD’s term though, as your bank may set a limit.
Choosing the Right CD for You
The best place to store your savings ultimately comes down to which product best fits your financial goals.
When it comes to CDs, your savings time frame, accessibility, and the best available interest rate will be the biggest factors in determining the right product. That’s why it’s important to have a plan for the cash within the CD.
“Start with your plan, and then through that the right product is the means to an end,” says Chantal Bonneau, CFP, wealth management advisor at Northwestern Mutual. “Just like a doctor would diagnose the problem before they start looking at different prescriptions, comparing all the side effects. If you know the problem, that narrows down what we’re looking at.”
Making the most of CDs in a low-rate environment
Traditionally, higher interest-earning potential gave savers incentive to lock away money in a CD. But when today’s rates sit near zero, interest isn’t as enticing a value proposition for most CDs.
Because of that, and in order to maintain as much liquidity as possible in today’s uncertain economic environment, consider keeping all your savings in an accessible high-yield savings account, at least until rates begin rising again. You can score a comparable (if not higher) interest rate, and won’t have to worry about access if you need it.
“Right now we have to be patient with our cash,” says Ashley Dixon, CFP, lead planner at virtual financial planning firm Gen Y Planning. “Every situation is going to look different for every family in this environment, so being more conservative with our cash this year is OK if that’s what feels right to you. You’re not going to miss out.”
But if you do choose to keep your savings within any type of CD, make sure you continue evaluating your options.
While a lower interest rate environment may change the drama of these different types of accounts, Bonneau says, it’s still important to check in on your interest rate regularly.
“If they do go up, you might find yourself in a very different situation. Don’t just set it and forget it for 10 years. Constantly reevaluate your plan, because the economic factors could change the choices that you make, and it’s important to always keep a pulse on that.”