- A CD is a savings-type account that earns a fixed interest for a fixed period.
- The principal in a CD should remain untouched for the period of the CD.
- Any withdrawal of money will lead to a penalty.
- CDs offer fixed, safe, and generally federally insured (up to 250,000).
- CDs don’t offer the growth potential of equity or debt investments.
- CD interest taxes are not on maturity, but when the bank gives you the interest.
- Check early withdrawal penalty (EWP) and make sure it does not touch your principal.
Warning
Missing the bank’s deadline for instructing it on how to handle the proceeds of your maturing CD can lead to involuntarily locking yourself into a subpar rate for years to come, or incurring an unwanted—and potentially hefty—early withdrawal penalty because you waited too long before extracting your funds.
Opening a CD will lock you in -
- Interest Rate
- Term (ends on maturity date - date on which money can be withdrawn from CD without penalty)
- Principal
- Institution
Important
When choosing the CD term, pay attention to the Fed’s rate-setting movements and plans. Opening a long-term CD right before a Fed rate hike can hurt your future earnings, while expectations of decreasing rates can signal a good time to lock in a long-term rate.