CD Investment FAQ
Q: How does a certificate of deposit work?
A: When an investor purchases a certificate of deposit, the issuing bank guarantees a rate of return based upon the amount of the CD and the length of the term. If the term is for 12 months, the money remains locked in the CD for that period of time.
Q: How is interest credited in a CD? Monthly? Quarterly? Yearly?
A: It depends on the bank and the type of CD. Some banks will compound the interest daily and credit it monthly, others will compound monthly and credit quarterly or yearly.
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Q: How can a CD be cashed out?
A: A CD that is cashed out prior to the maturity date will usually be subject to penalty. To cash out a CD at the end of the term, the owner can simply choose not to renew the CD.
Q: How safe are CDs?
A: The FDIC (Federal Deposit Insurance Corporation) insures CDs up to $250,000 per account owner.
Q: What is the highest yield ever earned on a CD?
A: To date, the highest yield ever earned on a CD was over 18% in 1980. But inflation during that era was also high, offsetting this seemingly phenomenal yield.
Q: Are there penalties for canceling a certificate of deposit?
A: While the penalty will vary from bank to bank, the penalty for early withdrawal is typically a loss of a portion of interest.
Q: What is the lowest amount that can be put in a CD?
A: Depending on the bank and type of CD, some can be purchased for as little as $100.
Q: Are there fees for opening a CD?
A: There are usually no fees associated with opening or maintaining a CD.
Q: How can I maximize interest income on a CD?
A: The best rates are often paid on CDs with the longest terms that are funded with large dollar amounts. However, it always pays to shop around for the best rates.
Q: Can I give a certificate of deposit as a gift?
A: You can open an account in the name of a minor under the Uniform Gifts to Minors Act (UGMA). If the person you'd like to gift the CD to is an adult, you must name him or her as a co-owner of the CD.
Q: Where can I buy a CD? How do I find a CD broker?
A: Almost all financial institutions in the United States, including brokerage houses and banks, sell CDs.
Q: Can purchasing a certificate of deposit improve my credit score?
A: In general, purchasing a certificate of deposit will not improve your credit score. It may, however, be beneficial if you are applying for a loan, as it can be listed as collateral.
Q: How can a certificate of deposit bypass probate?
A: A certificate of deposit can be established as a payable-on-death (POD) account. Upon the death of the account owner, the assets are transferred directly to the qualifying beneficiary without passing through probate.
Q: Can a certificate of deposit be used as collateral for a mortgage?
A: Yes. A certificate of deposit is a good source of collateral due to its liquidity.
Q: Is a certificate of deposit a good place to keep emergency money?
A: Yes. CDs typically pay a higher rate of interest than savings accounts. And the fact that the money is locked into the CD until the maturity date prevents most people from using their emergency funds for non-emergency purchases. Just remember that if the CD is redeemed prior to the maturity date that a penalty might be incurred.
Q: Is it better to open a certificate of deposit with more money or less money?
A: Higher rates are usually paid on larger CDs.
Q: Is a CD better than a high-interest bank account?
A: CDs should be considered as longer-term savings vehicles than regular savings accounts. Therefore, keeping enough money in a high-interest bank account that can be withdrawn at any time without penalty is always a good idea.
Q: If CDs have various rates of default, how can I pick a low-risk CD?
A: Choose a CD with the shortest term, such as six months.
Q: What will happen to my CD if the issuing bank collapses?
A: As long as to total value of your accounts does not exceed FDIC limits you will not lose any portion of your CD if the bank collapses.
Q: How are CDs taxed?
A: The money earned on a CD is taxed as interest income. The issuing bank will issue the account owner of a 1099-INT form at the end of the tax year.
Q: Can I buy a CD inside an IRA or 401k?
A: Yes. But unless you are at retirement age, most financial planners will advise against this.
Q: How can I calculate interest on a certificate of deposit?
A: If the interest earned is not compounded, multiply the amount of the CD by the interest rate. If the interest is compounded, multiply the amount of the CD by the interest rate after the first compounding period and add the interest to the total. Multiply this new total after the next compounding period and add it to the total. Multiply the new total by the interest rate after the next compounding period and so on.
Q: To what extent is a CD's interest rate guaranteed?
A: As long as the CD isn't callable, the interest rate is guaranteed at maturity.
Q: Are long-term certificates of deposit taxed at lower rates?
A: No. Interest earned on CDs is taxed at the same rate regardless of the maturity date.
Q: How can I find out the best current CD rates?
A: Smaller banks and online banks often offer the best current CD rates available.
Q: Are there CD accounts that I can continually deposit money into on a monthly basis?
A: Generally no, but an Add-On CD will allow you to add to the CD on a regular basis. The alternative is to simply buy more CDs.
Q: Are CDs FDIC insured?
A: CDs issued by banks and thrifts are FDIC insured.
Q: What government agencies regulate CDs?
A: The Securities and Exchange Commission regulates certificates of deposit. And depending on the bank that issued the CD, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration, or the Office of Thrift Supervision may also regulate CDs.
While we've covered the basics of CD investing here, CDs should only be part of a long-term investment strategy. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More CD Guidance
- CD Investment Guide — The complete guide to bond investing.
- CD Interest Features — Explore the interest features of CDs.
- CD Redemption Features — Explore the redemption features of CDs.
- Best CD Rates — How to find the best CD rates.