CD Rates and Guide
1. What is a Certificate of Deposit?
A certificate of deposit (CD) is a special type of savings deposit account in the form of a promissory note issued by a bank or credit union. They are not investment accounts by definition. CD rates are often higher interest than standard savings accounts and unlike regular savings accounts, these notes are a timed deposit with restrictions on withdrawing funds before maturity. When purchased at an FDIC-insured bank, they are federally insured for up to $250,000, per insured bank, per each type of CD. Interest earned is returned to the certificate holder upon maturity of the CD.
Different types of CDs have varying requirements and risks, restrictions, fees, tax implications, and insurability. They can lose value in some instances. New types of CD products become available as market conditions change, and not all types are offered by every bank, credit union, or broker.
Small CDs have amounts less than $100,000. Large and jumbo CDs have amounts greater than $100,000.
Certain terms of the contracts are non-negotiable. Others may be negotiable depending on the amount and other criteria.
They are purchased directly from a bank or credit union or indirectly through a broker. CDs purchased through a broker must meet specific criteria to be Federal Deposit Insurance Corporation (FDIC) insured or insured under the provisions of the National Credit Union Administration (NCUA).
Interest may be compounded daily, annually, or annually and then averaged.
Earned interest on some types of CDs may be required to be reported as annual income although the interest will not be paid until the CD’s maturity date.
2. What are the requirements for opening a CD?
Documents: All you need to open most CDs are basic identification, contact information and the minimum initial deposit. Ask ahead which sources of funding the bank accepts for the initial deposit and any future deposits, for example cash, types of checks, or credit cards. If you will be setting up a CD under provisions for a retirement account such as an IRA or provisions as a trust account, be prepared to provide similar information on any co-owners or beneficiaries.
Sources: Consumers commonly open CDs at a bank or credit union. They can communicate directly with their staff about the account, see in writing the terms of the account agreement, and verify that the CD will be fully protected by FDIC deposit insurance. Some banks and credit unions offer online purchases of CDs by established customers.
Another way to purchase CDs is through traditional brokerage firms, firms specializing in the sale of CDs or by using an agent. Customers would communicate directly with their deposit broker and not the issuing bank. Although individual depositors can open CDs this way, these firms more commonly establish co-mingled deposit accounts owned by multiple customers. This method can be attractive if, for example, the broker can negotiate a higher CD rate with a bank where she has made significant deposits on behalf of multiple depositors. It appeals to depositors who have substantial funds they wish to distribute among multiple banks.
CDs sold by brokers can be more complex and have greater risks than traditional ones sold directly by banks. This is especially true if the broker does not properly establish and maintain the CD on your behalf to meet the required FDIC guidelines for the funds to be insured.
3. How does a CD work?
When you purchase a CD, you commit to deposit a fixed amount of money for a certain period of time. This can be as little as a few months or as long as one year or more. In exchange, the issuing bank pays you interest at regular intervals. You receive the money you originally deposited plus any accrued interest when you cash in your CD at maturity. Upon maturity there will be a grace period, usually 5-10 days, to decide whether to roll over the CD into a new one.
Proof of purchase – It is less common today to receive a paper certificate, as a CD now consists of a simple book entry and appears as a line item on the consumer’s bank statement. Consumers can get a hard copy verifying their CD purchase by requesting one from the bank.
Minimum deposit amount
- This depends on the type of CD purchased.
- Additional deposits may or may not be allowed.
- Small CDs can be opened for about $250.00 or less in a starter certificate product.
- Large and Jumbo certificates can be opened with
Unlike regular savings accounts, CDs are not designed to serve as emergency funds or impulse spending on large purchases. Therefore, if you redeem your CD before the maturity date, you may have to pay an early withdrawal penalty or give up part of the interest you earned.
Should the bank fail during the term of the CD, the CD’s principal balance and interest accrued at the time of the bank’s closure are insured by the FDIC up to the applicable deposit insurance limit.
It is important to verify that any and all FDIC guidelines for the specific types of CDs you purchase have been met and are maintained to ensure continuing coverage.
FDIC amount limit
Your deposit insurance coverage amount is determined by adding together the insured account balances and accrued interest.
The FDIC deposit insurance limit is $250,000 per insured bank, per type of CD, regardless of who purchased them.
If you have CDs purchased by a brokerage firm at the same bank where you purchased separate CDs of the same type, this is a particularly important consideration when your total funds are close to or over the $250,000 limit.
Precautions – Consumers can minimize the risk of having uninsured funds and guard them against fraudulent brokers and others.
Three common precautions are to purchase CDs from different banks, purchase different types of CDs or a combination of both.
Confirm that the deposit account records maintained by the bank or a broker identify your ownership in the account. The CD can be in your name only or the names of multiple owners.
CDs acquired by a broker may be titled in the broker’s name but not yours. If this is the case, the deposit account should be set up as a fiduciary account. All deposit records should indicate the CD is held by the broker on behalf of others, for example, XYZ Management Client Account or XYZ Management, as broker.
A joint deposit account held by spouses, a trust deposit account, or deposit accounts owned by many depositors such as business partners are examples of CDs owned by more than one person.
Almost all CDs have a “call” feature. Ask if the CD’s call feature is only for the bank, for the CD owner, or both. This is important if either party wants to accelerate the maturity date, because typically it means a loss for one or the other.
Does it have a waiver that allows the CD owner’s designated representative to redeem and withdraw the principal and accrued interest without penalty when the owner dies?
Can your deposit broker sell your CD? If you want to redeem it before maturity, some brokered CDs may not have a prepayment penalty for early withdrawal because the deposit broker will try to resell the it on the secondary market. This may result in a profit or loss.
FDIC deposit insurance does not cover any loss resulting from the purchase or sale of CDs on the secondary market.
4. How do I choose the right CD?
Understand the features of a CD, and consider which ones make sense for you before you invest.
Make sure not only that the CD you or your broker acquires is issued by an FDIC-insured bank, but also that the type of deposit you are acquiring is insurable by the FDIC.
Make sure you completely understand all of the terms of the CD you plan to purchase. Carefully read the disclosure statements and fine print. Do not be dissuaded from asking detailed questions and requiring answers before you invest.
Make sure the deposit account has no restrictions that place the principal at risk other than early redemption. If it does, this would be considered an investment account and uninsurable by the FDIC.
How often will the CD earn interest, and will it be simple interest paid at the time of maturity or compounded so that you earn interest on the interest?
Know any fees.
Know when the CD matures, any provisions for automatic renewal, and whether the renewal cd rate will be at the old or the current CD interest rate at the time of renewal. This is particularly relevant for seniors, because if you are 80 years old, are you sure you can afford to wait five, 10, or 20 years to access the principal as well as any interest earnings of your CD?
5. Comparing CDs
The annual percentage yield (APY) is the effective annual interest rate earned for a CD. You can use the APY to compare different interest rates and compounding frequencies. As of March 4, 2014, the APY was 63% greater for a 5 year fixed CD rate than for a 5 year adjustable rate CD, for example. If you use an online certificate of deposit calculator for informal comparisons, you will need to enter the actual interest rate, not the APY. Here’s a comparison of three types of CDs and some of their features.
Variable CD Rates – Start with low minimum deposits less than $250. Has the flexibility to make additional deposits at any time without extending the maturity date of the CD. The interest rate can change daily. Yields a slightly higher return than a traditional savings account.
Adjustable CD Rates - Guaranteed rate of return on your CD and the flexibility of a one-time rate adjustment of up to 2%, if rates rise, without extending the maturity date of the CD. These can be market-linked, equity-linked, index-linked, or structured CDs.
Fixed Rate CD – Guaranteed CD rate of return over the life of the CD. Additional deposits are not allowed until the maturity of CD. Their APY is generally higher than other types of CDs. The minimum initial deposit for adjustable CD rate and for fixed CD rate: Standard – $1,000, Jumbo – $95,000, and Super Jumbo – $175,000. Except for the one-time rate adjustment available with adjustable CDs, the interest rates for it and fixed CD rates is locked for the term of the CD.
The earned interest can be added back to the CD balance or credited to another account monthly for all three types of CDs.
Safety Both the FDIC and NCUA offer more protection for retirement accounts than individual accounts. Accounts like a trust set up under different provisions can be covered to a higher amount, for example, up to $750,000 for three beneficiaries. The Certificate of Deposit Account Registry Service (CDARS) is a program that offers up to $50 million in FDIC coverage with a single bank deposit when opening multiple accounts is not practical. The bank can spread the money across multiple institutions participating in CDARS.
6. What are fees associated with CDs?
Penalties for early withdrawal or closure of an account before maturity are at the discretion of the financial institution. These stiff fees are calculated using different formulas and can end up costing you more than you originally deposited.
- Maintenance costs
- Sales charges
- Providing a certified check
7. Final tips on CDs Rates
Whether you choose a bank, credit union, brokerage firm or an agent, always obtain verification in writing that the CDs you purchase are fully protected by FDIC insurance.
Verify that a bank is FDIC-insured by calling the FDIC at 1(877)275-3342, Monday-Friday, 8:00 a.m. – 8:00 p.m., Eastern Daylight Time. 1(800)-925-4618 is the hearing impaired line.
Stack or ladder your CDs over time to have a continuous source of savings with easy access to funds on a regular basis.
Be aware of CD refinance, an uncommon practice by which a depository modifies its early withdrawal penalty in its favor.
Many banks and CUs let you manage your account online or on your mobile device 24/7.