Certificate of Deposit (CDs) - Meaning, Features & Benefits (2024)

FAQs

Certificate of Deposit (CDs) - Meaning, Features & Benefits? ›

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.

A CD, or certificate of deposit, is a type of savings account with a fixed interest rate that's usually higher than the rate for a regular savings account. A CD also has a fixed term length and a fixed withdrawal date, known as the maturity date.

Compared to savings accounts or money market accounts, CDs potentially can offer higher interest rates on deposits. That's because you agree to keep your money in the CD for a set time period. The interest rate and APY you earn depends on the bank, the CD term and the current interest rate environment.

Customers deposit their money for a set period of time or pay a penalty for withdrawal is a feature of a certificate of deposit (CD) .

One of the bigger disadvantages of certificates of deposits is they're subject to taxes. Any interest earned must be claimed in the year it was earned and not just the year when your CD terms. Depending on your income and deductions, this could lower your tax refund received.

CDs offer higher interest rates than traditional savings accounts, guaranteed returns and a safe place to keep your money. But it can be costly to withdraw funds early, and CDs have less long-term earning potential than certain other investments.

High-yield savings accounts

The best online banks offer APYs of 5.00% or more. If you deposit $500 in a high-yield savings account with a 5.00% APY, you could earn as much as $142 over five years — assuming you don't make anymore deposits and that the APY stays the same.

If it is FDIC-insured, as almost all banks are, CDs are considered among the safest investments available because the investor can't lose the principal, as is all too possible in the stock market. And the principal is insured even in the event of a financial collapse by the institution that holds the money.

CDs can help accelerate your savings, but they're not always worth it. If there's a chance you'll need access to your money during your CD's term, consider a high-yield savings account or money market account. But if you have a pool of money you can afford to lock up, it may be worth capitalizing on high CD rates.

How does CDs work? ›

Key Takeaways. Certificates of deposit (CDs) work differently from other bank and credit union accounts. They pay higher interest rates but also lock your money in for whatever term (or length) you've agreed to. CDs can be a safe place to put money aside until you need it while earning some interest in the meantime.

Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.

While it's unlikely, a certificate of deposit (CD) could lose money if you withdraw funds before you've earned enough interest to cover the penalty charged.

Market Crashes and CDs

Even if the market crashes, your CD is still safe. Your interest rate won't change, and your money is still insured. But, keep an eye on interest rates. After your CD term ends, you might find that new CDs have lower rates if the economy is still struggling.

Standard CDs are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000, so they cannot lose money. However, some CDs that are not FDIC-insured may carry greater risk, and there may be risks that come from rising inflation or interest rates.

Expert-Verified Answer. The interest rate on a CD, or certificate of deposit, is fixed and typically greater than the interest rate on a regular savings account. Additionally, it has a predetermined term end date and a predetermined withdrawal date, or maturity date.

CDs require an initial deposit that is held until the maturity date, which can vary from six months to five years. CDs generally pay higher interest rates than savings accounts because the owner cannot easily withdraw the money.