CD Investment: A Safe Haven for Your Savings (and How to Maximize Returns)
JUMP TO Section Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.- What is a CD?
- Types of CDs
- Where to find the best CD rates
- Strategies for maximizing your CD investment
- Factors to consider before investing in CDs
- Tax implications
- Is CD investing right for you?
- FAQs
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- A certificate of deposit is a type of savings account with a fixed interest rate and term.
- CDs are a safer investment than stocks and certain types of bonds.
- An early withdrawal penalty may apply if you cash out a CD early, but your principal stays intact.
Experts say the best place to save money is somewhere it can earn interest. While the stock market often provides the best return on your money, it's not a savings account. Money invested isn't easily accessible, and there's a chance you will lose it.
Putting your money in a certificate of deposit (CD) can keep your investment safe and put extra money in your pocket.
What is a CD?
Definition and how CDs work
CDs are a type of savings account, and aren't typically considered investments. CDs are a low-risk place to keep your money and pay lower returns in comparison to investing in the stock market.
Most CDs come with a fixed interest rate and terms that typically range from three months to five years. When money is deposited in a CD, you lock in an interest rate that lasts until the maturity date. The best CDs are currently offering over 5% APY for 18-month to 3-year terms.
Benefits of CD investing
One advantage of CDs is predictable growth. CDs earn a fixed rate of return, so you know exactly how much you'll get over the CD term when you open it.
Additionally, your money in a CD is secure because it's in an FDIC-insured bank account. Up to $250,000 per depositor is covered by FDIC insurance. In the unlikely event of a bank failure, you'll recover your savings. NUCA insurance covers CDs at credit unions, where they're called "share certificates."
Drawbacks of CD investing
The main downside of a CD is the lack of liquidity. Most CDs require a minimum deposit, from $1 to $25,000 or more, and you typically can't add money to the CD once the term begins. If you dip into the account before its maturity date, you will usually face an early withdrawal penalty that's equal to some of the interest you've earned so far.
Some may also consider the relatively low interest rates a downside. Compared to stock market investing and some bonds, CDs may earn a lower rate of return. CD returns are also unlikely to keep up with inflation over the medium or long term.
Types of CDs
There are several types of CDs that may be right for unique goals and financial situations. Common ones include:
- Traditional CD: These pay a fixed interest rate for a fixed period of time. If you want to withdraw money before maturity, you will face a penalty.
- No-penalty CD: These don't charge a penalty for early withdrawals, but typically offer a lower interest rate.
- Jumbo CD: For deposits of $100,000 or more.
- Callable CD: The issuing bank can decide to end the contract early and pay you any interest earned up to that point.
- Bump-up CD: The bank lets you request at least one rate increase during your term.
- Step-up CD: The bank grants one rate increase during your term, the size and timing of which is pre-determined at account opening.
- IRA CD: A CD purchased through a traditional, Roth, or SEP IRA that adopts the tax treatment of the overall account. Funding limitations apply.
Where to find the best CD rates
Online banks and credit unions typically offer more competitive rates than traditional brick-and-mortar banks. Still, you'll find the best CD rates by comparing offers for the same term lengths from multiple types of institutions.
Strategies for maximizing your CD investment
If you expect rates to fall, locking in a high rate through a long-term CD could be worth it. If you expect rates to rise, you could park your money in a short-term CD to take advantage of today's rates while maintaining the freedom to trade up if rates increase.
Some people use CDs as part of a larger savings strategy to optimize fixed interest rates and different term lengths.
"I have a few clients where we are implementing a 'CD ladder' strategy as a component of their fixed-income portfolio," says Anjali Jariwala, a CFP professional and CPA at Fit Advisors.
"The CD ladder is broken up into four tranches: three, six, nine, and 12 months. As CDs become due, the money is reinvested into another similar-term CD. If interest rates are rising, the goal is that you can pick up that higher-earning CD when your current CD matures."
Laddering is also helpful for those who want access to their money at regular intervals rather than locking up a large sum, but would like to earn more than savings accounts are currently offering.
Factors to consider before investing in CDs
Minimum deposit
Most banks have a minimum opening deposit ranging from $1 to $2,500 for traditional CDs or $100,000+ for jumbo CDs. Different amounts may pay different rates, so be sure that you understand what the financial institution is offering.
APY
If growth is most important to you, then you'll want to find a CD paying an APY at or above the current inflation rate. Remember that your rate is guaranteed for the timeframe you choose, as long as you don't make an early withdrawal.
Term length
Carefully consider your purpose for the money you're investing and match the CD's maturity date with that timeline. If you're unsure when you will need the money, choose a shorter term or opt for a no-penalty CD. If you're willing to stomach some risk, consider bonds or stocks instead.
Tax implications of CD investing
CD interest and taxes
Interest earned on CDs must be reported on your tax return annually because CD interest is taxable as ordinary income. Unless you have a significant amount of money invested, CD interest likely won't have a big impact on your tax bill.
Tax-advantaged accounts
There's one way to get around owing taxes on your CD interest each year, and that's by holding a CD in an individual retirement account (IRA). With an IRA CD, your interest earnings are tax-deferred or tax-exempt, depending on the type of IRA you open. However, you don't have access to your initial deposit or your earnings until age 59 1/2.
Is CD investing right for you?
Because of the early withdrawal limitations, a CD may be a good place to store savings needed by a specific date and not before then, Jariwala says, like money for a down payment or a home improvement project.
If you're worried about losing access to your money for a few months or years, a CD may not be the best option for you; a high-yield savings account is often the best place for an emergency fund.
When you can afford to weather some volatility, a brokerage account or retirement plan where you can buy securities that have the potential to earn a greater return is usually best.
CD investing FAQs
Are CDs a good investment? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.CDs can be a decent investment when they're paying at or above the inflation rate. Over the long term you're unlikely to earn more in a CD than you would investing in the stock market, but there's no risk of losing your principal.
How much interest can I earn on a CD? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.A $10,000 deposit in a 1-year CD with a 5% APY would earn around $500. However, interest earnings are taxed as ordinary income, which eats into your profit.
What are the risks of investing in CDs? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.CDs have inflation risk and interest rate risk. You can mitigate these risks by tracking interest rates and implementing a CD ladder strategy.
Tanza Loudenback Tanza Loudenback is a personal finance expert and a Certified Financial Planner (CFP). She was the founding reporter of Personal Finance Insider, covering topics including taxes, retirement planning, banking, real estate and mortgages, and budgeting. Her work has been featured in WSJ Buy Side, Fortune Recommends, Korn Ferry, TheStreet, Morgan Stanley Wealth Management, and Fidelity. ExperienceTanza was the first reporter on the Personal Finance Insider team. In addition to helping build the vertical from the ground up, she helmed a biweekly advice column answering readers’ personal finance questions and launched a personal finance newsletter. She also published two e-books under the Personal Finance Insider brand.She was the editorial lead on Master Your Money series, a two-year-long Business Insider series providing financial advice to millennials. She managed Master Your Money bootcamp events over the course of the series. While at BI, she also expanded tax coverage to include a guide to the best tax software and commissioned a panel of experts to review all articles. Tanza obtained her CFP license in 2020. She aims to simplify personal finance concepts for readers so that they can make smart decisions with their money. ExpertiseTanza’s areas of personal finance expertise include:- Real estate/mortgages
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Sophia Acevedo Banking Editor Sophia Acevedo is a banking editor at Business Insider. She has spent three years as a personal finance journalist and is an expert across numerous banking topics.ExperienceSophia leads Personal Finance Insider's banking coverage, including reviews, guides, reference articles, and news. She edits and updates articles about banks, checking and savings accounts, CD rates, and budgeting and saving. She is highly knowledgeable about long-term trends in rates and offers at banks across the U.S.Before joining Business Insider, Sophia worked as a journalist at her college newspaper and was a freelance writer. She has spent seven years writing and editing as a journalist.Sophia was nominated for an Axel Springer Award for Change in 2023 for her coverage of ABLE accounts, tax-free savings accounts for people with disabilities. She was also a winner of a 2018 California Journalism Awards Campus Contest for her photography.She loves helping people find the best solutions for their unique needs and hopes that more people will find the tools to solve their financial problems. She’s inspired by stories of everyday people adapting to their financial circumstances and overcoming their fears around money.ExpertiseSophia's expertise includes:- Bank accounts
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