There is no “best” or one-size-fits-all CD. You just have to choose the option that complements your goals. Here are some factors you should consider:
What’s the CD rate?
CD rates represent the interest your investment will earn before it reaches maturity.
You can’t set your own CD interest rate, but you can choose the most favorable option for your financial goals. You’ll need to choose which trade-offs you’re willing to make, whether that’s extending the term length for higher interest or accepting lower interest for a shorter term.
Here are some nuances to be aware of:
- The longer the term you choose, the higher the interest rate.
- Market interest rates can change once you place a deposit, increasing or decreasing the value of your CD.
- Market rates for CDs are influenced by factors like economic conditions and the U.S. treasury.
- CD interest rates may vary based on the issuer’s internal policies and strategies.
How much do you need to open a CD?
The minimum amount of money you need to open a certificate of deposit will vary based on the financial institution you’re working with and the type of CD they’re selling.
Typically, banks offer CDs with minimum deposit requirements ranging from as low as $500 to more than $1,000. Others don’t set a minimum deposit at all. Check with the specific bank or credit union you are interested in to find out their minimum deposit requirements for their CD offerings.
What happens when a CD matures?
Several things can happen when a CD matures. You can withdraw or “redeem” the funds, depending on your bank’s policy. Remember to check the policy before attempting a withdrawal.
Some other things that can happen include:
- Automatic renewal: If you don’t take any action, some banks will automatically renew your CD for a similar term. For example, if you had a one-year CD, it may be renewed as another one-year CD.
- Rolling over to a different term: You may have the option to choose a different CD term when your current CD matures. This allows you to take advantage of the latest interest rates and increase the value of your investment.
- Interest payment: If you don’t take action, some banks will automatically transfer the interest earned on the matured CD into a linked savings or checking account.
To make the most of your CD investment, it’s wise to plan ahead and decide what to do with the funds when the CD matures.
Which CD term will work best for you?
The CD term you should choose depends on your financial goals, risk tolerance, and the current interest rates. Here are some of the most common CD terms financial institutions offer and the benefits of each:
- Three months to one year is ideal if you’re worried about inflation devaluing the CD or you need access to funds soon.
- One to three years is ideal for higher interest rates without sacrificing short-term liquidity.
- Three or more years is ideal if you want the highest interest rate and won’t need to access the money in the CD soon.
Or, you can buy multiple CDs and stagger the maturity dates to access the earned interest at regular intervals.
Is there a chance you’ll need to make an early withdrawal from your CD?
Early withdrawals from a certificate of deposit have consequences, so consider them carefully. Here’s what you need to know about early withdrawals from your CD:
- Penalties: Most CDs have penalties for early withdrawals. Issuers typically base these penalties on a percentage of the interest earned or a specified number of months’ interest. The penalty amount varies depending on the terms of the CD.
- Loss of interest: In addition to penalties, you may forfeit some of the interest you’ve earned if you withdraw funds before the CD’s maturity date.
- Tax implications: The IRS will tax the interest you earn on CDs as income. Early withdrawals could mean you’re responsible for paying extra taxes the year you take out the money.
In some cases, you may be able to avoid or reduce penalties for early withdrawals. For instance, some banks offer “no-penalty CDs” or allow penalty-free withdrawals in circumstances like death or disability.
How will (or will) you grow your CD ladder?
A CD ladder is a savings strategy that involves continuously reinvesting the money from matured CDs into new CDs with staggered maturities.
Here’s how you can create and grow a CD ladder:
- Open multiple CDs with the financial institution of your choice.
- Set different term lengths for each – again, common terms include three months, six months, one year, two years, and five years. From there, you can select whatever cadence you prefer.
- Invest extra money back into your investments to keep your funds growing over time.
